Second Mortgage on an Investment Property: Is It a Smart Move?

What is a Second Mortgage?

A second mortgage is a type of loan that allows property owners to borrow against their investment property equity and It is below the primary mortgage in terms of priority given that in the event of a default, the primary lender would be given priority over the second lender. Second Mortgage can be easily broken down into two different types namely those that are secured against the land portion of an investment property and those which is secured against the buildings or fixtures attached to the land on a property.

• Home Equity Loans: A lump sum loan whereby the interest charge and repayment schedule are both fixed is illustrated.
• Home Equity Lines of Credit (HELOCs): A revolving credit facility which is capable of providing variable interest rates allowing for borrowing of funds at will.

Pros of a Second Mortgage on an Investment Property

• 1. Access to Capital: The second mortgage can give investors access to the capital they need to buy more properties, make upgrades, or pay for surprise expenses.
• 2. Potential for Higher Returns: In the event that the borrowed money is utilized wisely like upgrading property or investing in new properties, it has the potential to earn greater rental income and long-term value appreciation.
• 3. Lower Interest Rates Compared to Other Loans: Second mortgages tend to have more favourable interest rates than credit cards or unsecured personal loans, making them a financially sensible borrowing option.
• 4. Tax Benefits: Interest paid on a second mortgage may, in some instances, be tax-deductible, especially if the loan is for property-related costs. It is best to consult with a tax expert to learn about individual deductions.

Cons of a Second Mortgage on an Investment Property

• An Increase in Financial Risk: As the property in question acts as collateral it may see events which can result in a mortgage foreclosure which in turn will lead to a considerable financial loss for the borrower.
• Higher Interest Rates Second mortgages are usually provided with higher interest rates than first mortgages as a result of increased risk to lenders.
• Added Monthly Financial Load: Taking out a second mortgage creates additional monthly payments that can result in a shortfall in cash flow if rental income is insufficient to cover the cost.
• Property Value Fluctuations: Value changes in property happen frequently daily and are priced at an hourly rate and possible differences between real sales and reported sales render this abstract harder to quantify precisely thereby making it a hard task to establish a precise equation for such changes.