Second Mortgages in Canada
June 4, 2021 | Posted by: Andrew Wade
Second Mortgages Explained
Second mortgages are loans taken against a home that already has a mortgage on it. In the case of a second mortgage, you are using your own home as collateral for the loan.
Using the equity built up over time in your first home, you can take out a second mortgage to finance other big purchases with this collateral. Some investors will take out a second mortgage in order to secure a down payment for a second property. Other uses for a second mortgage include paying for the following:
- A child’s university or college tuition, or large student debts tying them down.
- Consolidating high-interest debt (only if its a higher interest rate then they are paying on the debt)
- Financing living costs after a job loss (short term living costs needed to get by)
- A down payment for a second property (only if it makes sense of course)
- Expensive medical treatment (not covered by insurance)
- Large Home Renovations
- There are two common kinds of second mortgages:home equity loans, and home equity lines of credit (HELOCs). Home equity loans are close-ended loans borrowed and paid back over time. HELOCs are open-ended loans that are borrowed against a homeowner’s home, paid back, and continuously borrowed if necessary. A HELOC IS similar to a personal line of credit or a credit card except there is collateral involved.
How Much Can You Borrow Through a Second Mortgage
The amount of money you can borrow through a second mortgage is dependent on a few factors: your loan to value ratio (LTV), your home’s total value, and your credit score. While different lenders have different rules around the loan to value ratio that they will lend within, most prime lenders will only allow you to borrow up to 80% of your home’s value.
Let’s take a look at an example of what you can borrow with a HELOC if you owned an $800,000 home, assuming you’ve paid off $300,000 in mortgage payments and interest.
Value of your home: $800,000
Maximum loan permitted: 80%
Loan amount based on home value: $640,000
Minus the balance owed on your mortgage: $500,000
Second mortgage credit limit: $140,000 max available depending on credit and the property marketability.
Where Can You Get a Second Mortgage?
Getting a second mortgage is not as easy as getting a first mortgage. Although you are able to borrow from a few different lenders, such as banks, credit unions, and alternative lenders, you are likely to face extremely high-interest fees with an alternative lender, as there aren’t as many of them available for a second mortgage. Banks and credit unions are the best choices in terms of interest rates for second mortgages.
Second Mortgage Rates
Factors That Affect Your Second Mortgage Rates
There are a variety of factors that can increase or lower the rate of interest on your second mortgage:
Your equity is the amount of your house you actually own, when you subtract the market value of the home (what a buyer will pay today) vs the loan against it usually held as a mortgage. This means the actual amount of your mortgage you’ve paid off so for as well as the homes increased value since you purchased it. For example, if you have purchased a home for $500,000, 5 years ago and now it is worth $600,000 today. You have also paid down approximately $100,000 of your mortgage, you have $200,000 of equity plus what you put down for your downpayment.
You’ll need to provide proof of income to ensure your lenders have faith in your ability to make your monthly payments. Generally, you will have a better chance of securing a lower interest rate if your income is high.
Your interest rate is likely to be lower if you have a good credit score. If you think your credit could be better, working to improve your credit score should be a top priority. This is a huge factor when it comes to B lending or securing a second mortgage as the rate of interest you will get will be largely determined by your credit score and your ability to pay this mortgage.
Your property acts as collateral if you take out a second mortgage. This assures lenders that their investment is secure in the event that you are unable to make your repayments.
Pros and Cons of a Second Mortgage
Like all investments, taking out a second mortgage comes with pros and cons:
Before taking out a second mortgage, make sure you assess the risks involved and carefully plan your budget before making any decisions. Make sure you speak to a Mortgage Broker and get some advice you can rely on. With enough planning and research, a second mortgage can help you pay off debt, put your children through university, or even put a down payment on a second property.