Mortgage Refinancing Versus Private Second Mortgage

“Mortgage Refinancing May Or May Not Be Your Best Option When Additional Capital Is Required”

Toronto Mortgage Brokers
Mortgage Refinancing can be an effective way to acquire more capital by leveraging the equity in your property.

But its not always going to necessarily be the best way, or only way, to get access to additional funds.

For example, a common reason for requiring additional capital is for the consolidation of debts to lower the overall interest rate being paid and reduce the monthly cash flow burden.

A mortgage refinancing of your existing first mortgage may be an effective strategy to provide additional funds for debt consolidation, but only if the net effect of refinancing doesn’t cost more than not refinancing.

For instance, when individuals have debts that require consolidation they may also have strained or damaged credit from the excessive short term debt they are carrying. They may also have a first mortgage in place that they acquired prior to debt run and the first mortgage may have very favorable rates and terms.

If a borrower that fits this profile opts for a refinancing of their first mortgage to consolidate debt, their strained credit may force them into a higher cost first mortgage than what they presently hold. Plus, depending on where interest rates have moved since they signed up for their first mortgage, there may be a considerable prepayment penalty to pay as well when completing a mortgage refinance action.

An alternative to refinancing your mortgage in this particular situation is to secure a private second mortgage against your property which will be registered behind your existing first mortgage.

By doing this, the larger first mortgage remains intact, including the favorable rate, and not prepayment penalties are incurred.

The smaller incremental amount required will be done via a private second mortgage, which will have a higher interest rate than the first mortgage, but could allow the weighted average cost of capital to be lower than what you might end up with after a mortgage refinancing.

The private second mortgage will likely only be for one or two years, but this will give you time to get your credit score in order so that you can preform a refinancing at a more favorable date in the future.

The only way to know for sure which strategy will work the best is to crunch the numbers for both scenarios with an experienced mortgage broker that deals with both private lenders and bank and institutional mortgage lenders.

If you have a mortgage refinancing scenario you would like to go through, we suggest that you give us a call and a member of our team will go over your situation with you.

Click Here To Speak To A Member Of The Walsh Team, Your Toronto Mortgage Brokers