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First vs Second Mortgage: The Differences

When it comes to accessing the equity in your home, knowing when to use a first vs second mortgage can be the difference between financial stability and unleashing greater financial value for yourself.  

If you are a homeowner and want to unlock the full potential of your home’s value, taking out a second mortgage may be the best choice for you. However, it is still crucial to understand the difference between a first vs second mortgage to make better-informed decisions that fit your financial needs.  

What Is A First And Second Mortgage? 

The topic of first and second mortgages is usually associated with mortgage loans. Mortgage loans typically need collateral, and lenders such as banks, credit unions, and alternative lenders would need to register a claim of repayment (called a lien) against the collateral to secure the loan. 

A first mortgage is the principal loan that pays for the purchase of a property. In this case, they are the first lien registered against the collateral. 

A second mortgage is the succeeding loan after the first mortgage, which is why they are the second lien registered against the same collateral. 

Second mortgages typically have higher interest rates than first mortgages because they have a secondary claim on a property. Since they are subordinate loans, once you sell the property, the first mortgage is paid off first, and the second mortgage is paid with the leftover amount. 

The Purpose Of A First Mortgage

The primary purpose of a first mortgage is to finance buying a home. In Canada, a percentage (usually 20%) of this cost is needed to be paid upfront, which is known as a down payment. The rest of the cost will be borrowed from lenders. 

Depending on the Loan-to-Value ratio (LTV), homebuyers can borrow up to 80% of the home’s value without insurance and up to 95% with mortgage loan insurance. 

Since first mortgages have priority claims against the collateral, the first mortgage lender is paid first in the case of default. This excludes the payment of property taxes, which are repaid first over other claims. Due to this priority lien, first mortgage lenders typically offer lower interest rates. 

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The Purpose Of A Second Mortgage 

Unlike a first mortgage, a second mortgage has far more uses than buying a new house. They can be used to: 

  • Access more capital: The money you take out using the equity from your home can be used to pay for large home renovations, launch a business, or other investments. Second mortgages can also cover other major expenses such as medical bills and tuition. 
  • Consolidate multiple loans: You can also use a second mortgage to consolidate multiple high-interest loans into a single loan at a lower interest rate. 
  • Serve as a down payment for a second home: As you regularly pay your first mortgage, more equity is built up, which can be used for a second mortgage. This equity can be used to finance another property purchase for investment. 

Second mortgages also come in diverse types depending on the financial needs and situation of the borrower:  

  • Home equity loans: With home equity loans, a lump sum amount is granted by the lender and is paid back at a fixed interest rate and schedule. Since the amount and interest rate are fixed, it will be easier to manage your finances as you will see how much you owe monthly. 
  • Home equity lines of credit (HELOC): With HELOC, you will have a credit limit based on the amount of equity you have. You can make multiple withdrawals during the draw period, and you’ll repay it during the repayment phase. 

How Are First And Second Mortgages Different? 

Aside from the difference in lien priority, here are a few more distinctions between first and second mortgages: 

  First mortgage  Second mortgage 
The amount you can borrow  Up to 80% of the home value without mortgage loan insurance and up to 95% with mortgage loan insurance  Up to 75% of the home equity, depending on the type of second mortgage and the lender. 
Interest rates  Lowest among other types of loans, but based on economic conditions  Higher than first mortgages but lower than credit cards and other unsecured loans 
Foreclosure/ Sale of property  Proceeds from the sale will be used to pay off the first mortgage lender  Proceeds from the sale will be paid to the second mortgage lender only after the first mortgage lender is paid off 

Pros And Cons Of First Mortgages And Second Mortgages 

Understanding the advantages and drawbacks of first and second mortgages is important in your home-buying journey.  

Pros of first mortgages: 

  • First mortgages have priority lien, which means the first mortgage lender is paid first in case of default. 
  • Interest rates are typically lower than other mortgage loans. 
  • Designed to finance home purchases. 

The drawbacks associated with first mortgages include: 

  • A more significant loan amount means you’ll have substantial debt to be repaid. 
  • Less flexibility, which means they may not cover specific needs other than home purchases. 

Pros of second mortgages: 

  • Access to more funds, depending on the equity owned.  
  • Second mortgages offer several types that can cover different financial needs. This versatility can be used for home improvements, starting a business, or making other investments. 
  • Interest rates can be lower than personal loans and credit cards. 
  • There is a positive impact on your credit history if you regularly make payments on time. 

However, watch out for drawbacks in second mortgages: 

  • Taking out a second mortgage means adding more financial obligations. 
  • Interest rates are higher than with first mortgages. 
  • Second mortgages can also come with fees such as origination fees, closing costs, and appraisal fees. 
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Conclusion: Obtain A Second Mortgage with Alpine Credits

To cover specific financial needs other than home purchase, a second mortgage may be a suitable option. However, qualifying for a second mortgage will be different for each lender, with some requiring your credit score, income, and financial history to determine your eligibility. 

With Alpine Credits, home equity is the primary consideration. With housing having high value across Canada, the equity may be significant, leading to greater funding potential. To start, apply online or contact one of our Financial Solutions Specialists today.

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Frequently asked questions

With Alpine Credits, you can borrow up to 75% of the appraised value of your home minus the outstanding balance from your mortgage. 

While traditional banks can offer them, second mortgages like home equity loans are quicker to obtain from alternative lenders like Alpine Credits. 

The main benefit of a second mortgage is its flexibility in covering various financial needs. Whether starting a business, renovating your home, or paying medical bills, a second mortgage allows you to access significant funding at lower interest rates than unsecured personal loans and credit cards.