September 5, 2017

Thinking about adding a second or third mortgage to your house? Read this first.

When you buy a house you only really have two options:

      1. Pay for it in one lump sum; or

      2. Obtain financing through some sort of mortgage arrangement.

Before we go any further with this discussion, let’s think about ‘why’ you would want to buy a house in the first place.  There are quite a number of reasons that people want to buy houses including:

  • A hedge against increasing housing costs
  • Family security
  • Desirable neighbourhood
  • Keeping up with the Joneses
  • Location of school/work
  • As a ‘flipper’ to make money
  • Rental or investment property

Undoubtedly there are many more reasons why people want to buy a house but the following likely don’t rate amongst them:

  • Like to pay massive amounts of interest
  • Enjoy being removed from property by legal action
  • Have lots of money to waste

Unfortunately Canadians are generally financially illiterate and are easy marks for all sorts of pecuniary blunders including over-insurance, over-financing, over-indebtedness, excessive fees, and over-estimating their own capacity to deal with financial matters.

Estimates of value that are relied on by institutional lenders are sometimes generated from computer data bases and have little, if any, relationship to actual values of property.  At times they compare big city values with small town properties that even with adjustments leave the small town properties overvalued.

If it is your property that is overvalued you may be happy that you qualified for the loan, at least until you find that you have over-leveraged your property and have no way of selling it and getting out of debt.

Private mortgage lenders are generally more concerned with investment than lending, if the difference is discernable.  Private lenders assess risks differently and often more carefully than institutional lenders and the higher levels of risk they are prepared to take on are reflected in the higher levels of interest and other fees they charge for their loans.

Many second and third mortgages are private mortgages, carrying with them high interest rates and high service fees.  Second and third mortgages are more likely to trigger powers of sale than first mortgages, not just because of their position but because they place additional strain on the mortgagee’s budget.  Now go back to our first bullet list and think about why you bought the house in the first place!

Adding more interest and longer terms to the purchase of a house is never a good idea.  A better idea might be to simply sell the house and use the resulting equity to pay down your debts rather than dig yourself into a deeper, perhaps intractable, financial problem.

Before refinancing talk to a local Licensed Insolvency Trustee for their advice.  An Insolvency Trustee is interested in getting you out of debt and getting you on track with a thoughtful approach to budgeting.  On the other hand a lender is interesting in leveraging your paycheque to generate interest.