If you are struggling with substantial debt, whether from credit cards, payday loans, or lines of credit, you may have considered taking out a second mortgage to pay off your debt. Consolidating debt through a secondary mortgage can prove advantageous for certain individuals, particularly given that mortgage loans typically offer lower interest rates compared to many other forms of credit. However, this approach is not always advisable. Swapping out high-interest debts with a second mortgage has the potential to make things worse, and in some cases, it may even jeopardize your home.
In this article, we will delve into the mechanics of a second mortgage. Additionally, we will explore the pros and cons associated with this financial strategy, enabling you to determine whether it is right option for you or not.
What is a Second Mortgage?
When you take out a second mortgage, you are taking out an additional loan on a property you already have a mortgage on. It allows you to access more credit, which you can use as you please and repay through regular monthly payments, just like your first mortgage. And, like your first mortgage, your home serves as collateral for the second one.
Pros of Using a Second Mortgage to Pay Off Debt
- Lower interest rates – The interest rate on a second mortgage typically tends to be lower compared to debts such as credit card debt. This is because having an asset like home equity secured against your second mortgage often allows for a reduction in the interest rate. A lower interest rate means that a greater portion of your monthly payment each month goes toward paying down the principal.
- Access your equity – Their home is one of the most valuable assets most Canadians have. A second mortgage lets you turn that (usually) illiquid asset into usable cash.
- Consolidation of your debts – Combining your debts into one place simplifies your repayments.
- Tax advantages -If used for home-related improvements or repairs, second mortgage interest can be tax-deductible.
Cons of Using a Second Mortgage to Pay Off Debt
- Lengthy application & fees on second mortgage – Applying for a second mortgage loan is a lot like applying for the first. It may take a while to get approval, and you’ll incur additional fee & closing costs.
- Limits on loan size – The amount you can borrow is circumscribed by how much of your home you own outright.
- A new monthly payment – Getting a second mortgage means adding another monthly obligation to your budget.
- Puts your home at risk – Borrowing against your home means you’ll be putting it on the line; if you can’t make payments, you could lose your home.
The Bottom Line
Consolidating higher-interest debt into a lower-interest home equity loan can help you pay off debt faster and cheaper. Make sure that you understand the risks of a home equity loan before you sign up for one. If you are considering a second mortgage and are unsure of the best path to take, book a consultation with us.