Second Mortgage Financing

“When Should You Consider A Second Mortgage Financing Option?”

Toronto Mortgage Brokers
In situations where addition funds need to be accessed from available equity in the home, a second mortgage on residential property can be a viable option.

There can also be differences between a second mortgage registration on a property to secure a line of credit compared to a stand alone second mortgage with its own long term amortization schedule for repayment.

Most major banks and institutional lenders either don’t issue second mortgage commitments, or don’t include them at all as part of their residential mortgage lending programs.

The primary focus of bank or institutional lenders is first mortgage lending and mortgage refinancing of existing mortgages. Second mortgage charge scenarios are more restricted to secured lines of credit in many cases.

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At least part of the reason for the lack of interest from the banks with respect to second mortgages is that this type of financing facility is going to equate to higher ratio financing against the property, so unless a mortgage lender is going to provide a second mortgage behind their own first mortgage, its unlikely they are going to be willing to sit behind another lender’s first charge position on the security.

And if a lender is prepared to lend more against the existing property, they are more likely to rewrite the first mortgage or refinance in some fashion to provide the additional capital being requested.

From the borrower’s point of view, a second mortgage option is more relevant in situations where it would not be advantageous to refinance the first mortgage due to a change in interest rates, a deterioration of credit, lower available debt service, or some combination of these three.

A second mortgage solution would then be used to preserve the benefits of the first mortgage already in place while still allowing the borrower to access more financing out of the available equity.

This type of second mortgage financing is most often provided via a private mortgage lender where there is less emphasis on credit scores and debt servicing rations.

In fact, the large majority of second mortgages issued are from private lenders and tend to come with short interest terms, typically no more than one year.

This basically provides the borrower with a source of short term bridge financing to provide time to either improve their credit profile in order to qualify for a first mortgage refinancing or renewal in the near future, find another source of funds to retire the second mortgage, or allow for the sale of the property without the presence of distress which would likely reduce the amount of proceeds the seller could expect to receive.

That all being said, there still are institutional second mortgages that do get issued each year, but most of the time it will be from a lender that is prepared to extend a second mortgage after their own first mortgage already in place.

As previously mentioned, secured lines of credit are many times secured by a second mortgage position and therefore a form of residential second mortgage financing.

In order to determine if a second mortgage is right for your situation, and if you should be considering a bank or private lending solution, your best approach would be to consult with an experienced mortgage broker who can work you through the different options available to you in order to make a well informed decision that meets your financial requirements now and in the future.

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