What is a second mortgage?

Second Mortgages are very common as securities for banker’s advances in almost in every country. Second Mortgages are formed when a person takes loan second time on a same property on which he has already taken the loan. This second loan is known as Second Mortgages loan. And is a subordinate to the first mortgage.

The interest rate on Second Mortgages is usually high as it is riskier; as a result the interest rate is also high for this mortgage. The interest is calculated based on (APR) Annual Percentage Rate. The rate also varies on lender to lender. The lender calculate it on the base of monthly and weekly but the rate and time period will not be change one settled between the lender and borrower. These will remain same till the final of the contract.

Usually, Second Mortgages are used for the purpose of like home improvement, to pay for the study loan or for debt consolidation. And the owner of the property has to pay the both at the time. Therefore Second Mortgages loan is much riskier than first mortgage loan for the banks.

As stated above, the second Mortgages are very riskier for the banks, therefore the Bankers have made it a rule that they must not accept a second mortgage without prior permission from their Head Offices. However following are the major risks in Second mortgages:

(1) The title-deeds will have to remain deposited with the first mortgagee and this will not for the undertaken of second mortgagee. Because the bankers advance second mortgage loan on the mercy of first mortgagee. In case the first mortgagee decides to exercise his rights of sale, the second mortgagee will be forced to redeem the first mortgage or lose his security. If the sale proceeds are not sufficient to repay both the debts, any arrears of interest due to the first mortgagee will be added to the capital sum owing to him. Though the first mortgagee may exercise his right to sale in conformity with the terms of mortgage, he is under no obligation to delay the sale merely to obtain a better price, and so, to improve the position of the second mortgagee.

(2) In case the first mortgagee successfully exercises his right to foreclosure, it will have the effect of extinguishing the second mortgage.

While taking these risks into consideration the bank will take the following precaution into action.

(a) It must be ensured that there is an adequate margin between the value of the property and the amount advanced by the first mortgagee. As a matter of practice the bankers generally try to arrange for the first mortgagee to be paid off.

(b) The mortgager’s title must be investigated in a manner very similar to the first mortgage. However, in practice, bankers sometimes do not attend to it on the assumption that the first mortgagee had attended to this matter.

(c) Since the second mortgagee is without the title-deeds, the mortgagee will be protected by registering his mortgage as a second charge. This will secure his priority as against subsequent encumbrances.

(d) The banker must serve the formal notice of second mortgagee on the first mortgagee, who should be asked to state the amount of his loan and to confirm that he is not under any obligation to make further advances against the mortgage. This will prevent him from further advancing. The giving of formal notice to the first mortgagee places him under duty to hand over the title-deeds to the second mortgagee when the first mortgage is discharged.