If you are struggling with crippling debts and do not know how to make your next payment, you may have considered taking out a second mortgage to pay off your debt. As well as other debt relief options, you may well have considered a second mortgage to pay off debt. But how does this work? And how can it help relieve you of your debt? In this article, we explore what a second mortgage is, how to use a second mortgage to pay off debt, and how you can get started. We also share some alternative options if you are not sure a second mortgage is quite right for you.
What is a second mortgage?
A second mortgage is a type of finance you can get on a property that already has a mortgage (a first mortgage). It enables you to secure additional credit, allowing you to make repayments as a second priority to the primary mortgage you already have on your home. As you will have two mortgages, you will need to repay each mortgage separately, no matter if it is the same lender or not. When you take out a second mortgage, you receive a lump sum payment that you repay over an agreed period of time. The lump sum is determined by the amount of home equity you have. If you do not make your repayments, you can be forced to sell your property. Second mortgages are most often explored in a few common situations like the following:
- If you are trying to consolidate your credit card debt at a lower interest rate
- If you are struggling to afford your mortgage payments
- If you are thinking of applying for a bad credit second mortgage
In these instances, you should first speak to an experienced Licensed Insolvency Trustee who can help. They will work with you to explore all your options and advise you on which may work best for you and your financial circumstances.
When is a second mortgage useful?
There are a few scenarios when second mortgages are commonly explored in Canada:
- To consolidate debt – a second mortgage to pay off debt with a high interest rate can allow you to focus on repaying a loan at a lower interest rate with simplified payments
- To borrow for a large purchase – perhaps you want to extend your property, fund a refurbishment, or pay for your child’s education. A second mortgage can enable you to make the purchases you might not otherwise be able to afford
- You want to buy a second property – be it a vacation rental or an investment property, a second mortgage can help you to buy it
What do you need to secure a second mortgage?
You will need a few things to secure a second mortgage:
- Sufficient equity in your property to act as collateral for your second mortgage. Lenders are typically prepared to allow you to borrow up to 80% of your home equity in a second mortgage, which means you can borrow a sufficient amount for home renovations
- A good credit score
- An ability to repay your second mortgage payments
- An appraisal. You may well need an official valuation of your property to determine the equity in your home.
Can I get a second mortgage to pay off debt?
Yes, you can take out a second mortgage to pay off debt. If you are grappling with multiple debts and are a homeowner, you may wish to pay off your debts with the lump sum you can borrow against your home equity. This is particularly useful in scenarios where your debts carry high interest rates compared to the rate you can secure in a second mortgage. Second mortgages also allow for debt consolidation – you can merge your debts into one place, making it much simpler to repay your debts. Often, you can secure a much lower interest rate too.
Which debts can you pay off with a second mortgage?
Second mortgages can be used to repay most types of unsecured debt. This includes debts like credit card debt, personal loans, and tax debt.
What are the advantages of using a second mortgage to pay off debt?
While we have shared below the advantages of using a second mortgage to pay off debt, it is completely determined by your unique circumstances. Always seek the support from an expert Licensed Insolvency Trustee when it comes to issues surrounding your debt.
- The potential to reduce your interest rate. The interest rate on a second mortgage is likely to be lower than the rate associated with other debts like credit card debt. Having an asset like home equity secured against your second mortgage means the interest rate can often be reduced.
- Consolidation of your debts. Combining your debts into one place simplifies your repayments.
- The ability to borrow a large lump sum. Depending on the size of your home equity, you may be able to borrow a large amount of money which could repay a number of debts.
- Avoid early repayment fees. If you take out a second mortgage, you do not need to pay early repayment fees. This is not the case when you remortgage.
What are the disadvantages of using a second mortgage to pay off debt?
Second mortgages also have a few disadvantages:
- Putting your home at risk. Consolidating your debts into a second mortgage does put your property at risk if you fail to make your second mortgage payments on time.
- Fees on a second mortgage. Although second mortgages avoid early repayment charges, they still come with fees and expenses.
- The risk you may not be able to secure a second mortgage. If you have multiple debts, you may already have a poor credit score. This could prevent you from accessing additional credit, including a second mortgage. You may need to look for an alternative form of debt relief in this scenario.
Should I take out a second mortgage to pay off debt?
If you think a second mortgage will help to simplify your payments and reduce your interest, you may wish to consider using this form of debt consolidation. It is very dependent on your unique financial circumstances, and the second mortgage product you can secure. It is a good idea to speak to a Licensed Insolvency Trustee if you are concerned about debt repayments – at Spergel, we offer a free consultation. You may also want to consider alternative debt relief options that may work better for you.
Alternative forms of debt relief
Alternative forms of debt relief may reduce the overall cost of your debt, and pose less risk to your home. Here are our top recommendations for alternative debt relief options:
Consumer proposal
A consumer proposal is a legal form of debt settlement that can reduce your debt by up to 80%. It is the process of working with a Licensed Insolvency Trustee to suggest an affordable monthly repayment amount to your creditors. Your Licensed Insolvency Trustee will then work to negotiate with your creditors on your behalf. If accepted, you only need to make your affordable monthly payments for a period of up to five years. Advantages of a consumer proposal include a stay of proceedings to protect you from your creditors, and the ability to keep your home. At Spergel, we have a 99% acceptance rate on any consumer proposals we file. This means you have a 99% chance of reducing your debt by up to 80%.
Bankruptcy
Bankruptcy is the legal process of assigning any non-exempt assets over to a Licensed Insolvency Trustee in exchange for the clearance of your debts. These assets will then be sold with any proceeds going towards your creditors for the repayment of your debt. Advantages of bankruptcy include a fresh financial future and protection from your creditors. Although many Canadians think that bankruptcy means you lose everything, this is not the case. You can still keep some basic assets including your car and home.
If you are considering a second mortgage to pay off debt and are unsure of the best path to take, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees will review your financial circumstances and advise you on the best pathway to take. We have been helping Canadians gain debt relief for over thirty years. Reach out today – you owe it to yourself.