Will A Second Mortgage Clean Up All Your Debts?

Posted in Debt Help
Posted by Angela Marquis, CERTIFIED CREDIT COUNSELLOR

The number one reason people take out a second mortgage is to pay off credit card debt! The question is will this help you clear up those debts? For some people it will and for others, it can create even more problems. Before you commit yourself to a possibly high interest second mortgage, here are three factors to consider.

second mortgage consolidate credit card debt

Do You Have Enough Equity?

Generally, when lenders are considering an application for a second mortgage, they will look for answers to 4 questions:

  • Do you have available equity after your first mortgage or other debts secured against your home;
  • How low is your debt-to-income ratio?
  • What is your credit score? This will affect not only whether or not you receive a long but will also influence your second mortgage interest rates, and  finally;
  • Do you have a solid employment history.

As a starting point if you don’t have sufficient equity in your home to repay all of your outstanding credit card debt (or whatever debts you want to consolidate into your home mortgage) than this is a non-starter. It probably does not make sense to consolidate ‘some’ of your debts. If you can’t deal with everything with a refinanced second mortgage you should look to other solutions to your debt problems.

Can You Afford The Payments?

Second, you should evaluate whether or not taking out a second mortgage is going to solve your cash flow problems. Create a personal budget to make sure you can afford the additional mortgage payments.

A second mortgage is just that, second, meaning it is subordinate to another loan against the same property. That means that in the event of a forced sale, the first mortgagor gets paid off before the second mortgage holder.  This is why second mortgages are riskier for lenders and therefore, generally come with a higher interest rate than the first mortgage. If your mortgage rate is high because you are a high credit risk, there may not be enough savings to make a long term difference in your ability to get out of debt.

Will You Risk Foreclosure?

Keep in mind a second mortgage is secured by your property and if you stop making your payments, it can put your “home-sweet-home” at risk since your debt is no longer an unsecured debt.  Converting unsecured credit card debt into a secured second mortgage entitles your second-mortgage lender to take your house through foreclosure, even if there is no equity in the house.

Also, if your plan is to sell your house in the near future, you have to pay off the second mortgage in order to sell the house.

If your debt is weighing you down and you are looking at a reduction in your monthly payments, before securing all your debt to your home, you may also want to look at filing a consumer proposal.  A consumer proposal will give you a fresh start without the risk of a second mortgage.

If you would like to compare your second mortgage option with that of filing a consumer proposal, talk to one of our local trustees. We can help you review your budget, compare the costs and make a decision that will solve your debts, not just postpone the problem.

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One thought on “Will A Second Mortgage Clean Up All Your Debts?

  1. Ross Taylor

    Very good post Angela. A couple of additional thoughts. (1) Often a second mortgage lender will not be worried about a low credit score if the covenant is otherwise good. (2) Second mortgages can be an excellent way to pay off a consumer proposal and accelerate the recovery process by several years.

    As an example, suppose a debtor still owes $15,000 in her Hoyes Michalos consumer proposal, and is paying $300 per month towards it. A second mortgage could be arranged to pay off the whole amount and the new monthly payment would be comfortably under $200.

    Couple this repayment with a proper credit score rebuild, and in a few short years her credit report will be singing like an angel.

    Reply

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