All you need to know about second mortgages

At PADS Financial, we get a lot of inquiries into second mortgages. With the current financial situation in Quebec – high cost of living, lack of real estate supply and household debt at record levels – many homeowners are looking for solutions, like second mortgages, to access more cash or pay down debt. We strive to inform and impower our readers and clarify any misconceptions or uncertainty around financial loan products. Today we propose to you the following deep dive into second mortgages. So, sit back, close TikTok and let’s learn!

Let’s start from the beginning. What is a second mortgage?

A second mortgage, as its name indicates, is a second loan taken out on a property. While first mortgages are usually taken out to purchase a home, second mortgages can be used to access funds from the equity built up in the property for things such as home renovations, debt consolidation or other expenses. For all intents and purposes, a second mortgage and a home equity loan are the same thing.

Does a second mortgage impact your credit?

Taking out a second mortgage won’t hurt your credit score however your credit score may be temporarily impacted by the credit check done during the application process. In fact, if you are diligent about making your second mortgage payments on time, a second mortgage can even help you improve your credit score.

Is a second mortgage the same as refinancing?

No. Refinancing means renegotiating your existing mortgage while a second mortgage is a separate mortgage often with a different interest rate and likely with a different financial institution. Obtaining a second mortgage instead of refinancing can help you take advantage of better terms and avoid costly penalties from refinancing before the end of your term, if you require the funds immediately.

What is the interest on a second mortgage?

Ah, the million-dollar question. Interest rates on second mortgages are often higher than on first mortgages because they are riskier for lenders for the simple reason that the first mortgage has priority on the collateral if the borrower defaults on the loan.  

The interest rate will also depend on the equity on the property and the property value.

If you’re looking to find out what rate you could obtain with a second mortgage, fill out the second mortgage interest rate quick quote form PADS here . We’ll send you a personalized estimated interest rate for your loan in 30 minutes (or the next business day if you submit it in the evening or on weekends. Yes, even our underwriting model takes the weekend off).

How much equity do I need for a second mortgage?

Once the real value of your property is established, lenders will look at your first rank mortgage amount and your current equity to determine how much you can borrow. In the image example below, the property is worth $1,000,000, the outstanding loan is $500,000 so $500,000 is the amount from which funds can be borrowed for a second mortgage.

In the best case scenario, a borrower is eligible to take out 80% of the property value minus the mortgage balance. So in the scenario below, for a property worth $1 million with a  $500,000  mortgage, the maximum loan amount would be $300,000 (1M*80%) - 500k)).

Second mortgage calculator

Online mortgage calculators are great tools to play around with and get a general idea of what payments to expect with a second mortgage. Our second mortgage calculator allows you to estimate payments based on loan amounts, credit score as well as loan type.

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Second mortgage rates

Interest rates for second mortgages are often determined by the amount of equity a homeowner has in their property; the more equity, the lower the risk for the lender, potentially leading to a more favorable interest rate. These rates are also influenced by broader economic factors, including the prime rate, which is the interest rate banks charge their most creditworthy customers. Lastly, individual factors such as the homeowner's credit score and debt-to-income ratio also play significant roles in setting the specific rate for a second mortgage. PADS Financial second mortgage rates hover between 10% to 18%.

Can a second mortgage pay off the first mortgage?

Borrowers decide what they choose to do with the funds received from a second mortgage so in theory yes, you could use a second mortgage to pay off your first mortgage, but it may not be the best idea because second mortgages often come with higher interest rates than first mortgages due to being considered higher risk. Another thing to consider is that the amount you can borrow with a second mortgage is based on the difference between your home's current value and your first mortgage balance which may not be enough to pay off a first mortgage.

Is a second mortgage the same as a Heloc?

A second mortgage is not the same as a Home equity line of credit (heloc). Without getting into too many details, here are ways Heloc’s and home equity loans are different:

• Helocs work like credit cards – where you have a maximum amount you can borrow and you used it as needed while a Home equity loan is a lump sum payment.

• Interest rates on Helocs are usually variable while home equity loans have a fixed rate so the payment is the same every period.

Second mortgage vs home equity loan

A second mortgage and a home equity loan are the same thing; a second rank loan on a property that allows homeowners to borrow from the equity in that property.

How do I apply for a second mortgage?

We’re delighted you’ve asked! As a homeowner with equity on your property, you can apply for a second mortgage for PADS Financial in minutes. Simply visit PadsFinancial.com and apply online. The application process is simple and streamlined and you can expect an answer in 24 hours. Our team is standing by!

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