Silent Second

As a personal banker, I hate to draw attention to this next practice. However, in the interest of creating an inclusive index about how to manage a mortgage, it is important to mention that there are always options available for the aggressive borrower. A ‘Silent Second’ refers to a second mortgage that has been taken out against home which another bank already has a claim on.

This is usually taken out by borrowers that are experiencing some extreme financial difficulty, and need access to funds right away. While their main lender might not be willing to extend to them a loan on a small out of home equity that has been freed up by previous payments, a second institution specializing in ‘distressed’ loans may be happy to do so.

They will generally extend what is essentially a second mortgage on the home, in exchange for a less favourable interest rate. However, this creates a situation where there are now two financial institutions with legitimate claims to the underlying collateral of the home.

The end result is that, in the event of a default, the institutions will be placed in a position where they will need to settle the balance of the loan between themselves. What’s more, they will then also need to settle out any change in the value of the home.

Given that the original bank will usually be fairly frustrated with you as a client for having gone behind their back for a second loan, they will usually take this default as an opportunity to begin pursuing you for other assets that will make up for the value of the new equity. The end result is that they will try to sue you for all you’re worth. However, if you can pay off the second loan without the first bank knowing (ie. ‘silently), you’ll be able to walk away scot –free.

Although silent seconds may seem like an appealing solution in desperate situations, it is sometimes better to simply use the threat of a silent second as a way of motivating your personal banker to give you better terms. If you produce a quote for a silent second from another financial institution and present it to your personal banker, it is usually enough to put them into re-negotiation mode, even if it ticks them off a little bit.

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