A second mortgage, often seen as a financial lifeline, allows you to use the equity in your property for extra cash. But it comes with a catch; it means juggling two loans at once and the potential of losing your home if not managed carefully.
To make wise financial decisions, we’ll break down the key info, benefits, and risks in this blog so you can understand it and decide on your next financial move with confidence.
What is a Second Mortgage in Canada?
A second mortgage in Canada is a loan secured by your property when you already have a primary mortgage. It’s called “second” because it’s subordinate to the first mortgage, meaning the primary lender gets paid first if there’s a default.
Second mortgages can be a HELOC or a home equity loan, with lower borrowing amounts and higher interest rates because of the added risk.
How Does a Private Second Mortgage Work?
Getting a second mortgage in Canada might not be possible through your bank because they have strict approval criteria. However, mortgage brokers specializing in secondary financing can arrange both institutional and private second mortgages, offering more flexibility.
These mortgages are secured by your home, leading to competitive rates and flexible terms. Compared to your initial home loan, getting a second mortgage is easier and faster.
Home equity loans can be approved within 24 hours, regardless of income or credit issues. You can borrow up to 80-85% of your home’s value, and your home equity increases as you repay the loans.
Types of Second Mortgages
Here’s a table summarizing the different types of second mortgages, including a comparison of their key characteristics:
| Criteria | HELOC | Home Equity Loan | Private Mortgage |
| Interest Rate | (Prime + 0.5 – 2%) | 6% – 9.99 % | 8% – 12.99 % |
| Type of Loan | Revolving | Fixed | Fixed |
| Minimum Credit Score | 650+ | Varies | No Minimum |
| Maximum Loan-to-Value | 80% | 80% | 85% |
| Lenders | Major Banks, Credit Unions, B-Lenders, Private Lenders | Major Banks, Credit Unions, B-Lenders, Private Lenders | Private Lenders |
Remember that the specific terms and availability of these mortgages can vary between lenders depending on your financial situation, so consult with financial professionals when considering a second mortgage.
Fees and Interest Rates on Second Mortgages
When obtaining a second mortgage, you may be subject to incur additional costs which can often be built into the overall cost of the mortgage:
Second mortgage rates are higher than the first because the second lender assumes more risk. The first mortgage holder always gets paid first in the event a homeowner fails to make their payments on time. The second mortgage lender only gets paid if there is sufficient equity in the home to cover both the 1st mortgage and the 2nd mortgage.
How to Qualify for Second Mortgage
Before you can secure a second mortgage, you must meet certain criteria. Lenders will assess the following factors:
- Equity: You’ll need to provide details of your primary mortgage to demonstrate your available equity.
- Income Verification: Proof of steady employment helps lenders assess your ability to manage a second mortgage but is not necessary.
- Credit Score: Higher scores often lead to better loan terms, but credit is rarely a determining factor in approvals. Rather, the amount of equity in a home is often the determining factor in 2nd mortgage approvals.
- Property Value: An appraisal of your home is required to establish its current value.
These factors are crucial in determining your eligibility for a second mortgage.
Is a Second Mortgage a Good Idea?
A second mortgage is beneficial if you use the funds for the right reasons. Just make sure that you use the money for its intended purpose. If you are borrowing to consolidate credit card debt, do just that.
Some homeowners use their loans for home renovations. Upgrades and renovations can add significant value to a home. Homeowners looking to sell can utilize the funds to enhance their property, increasing its resale value significantly. A second mortgage can be smart if you use the funds wisely.
Consider using it for:
- Debt Consolidation: Pay off high-interest debts, like credit card balances.
- Home Renovations: Enhance your property’s value, especially if you plan to sell.
- Investing in Real Estate: Purchase rental or vacation properties.
- Various Needs: Use the funds for education, business, or other financial goals.
Collaborating with a mortgage broker can maximize the benefits of your second mortgage.
Alternatives to a Second Mortgage
If you require extra funds and can manage the additional expenses, a second mortgage might be suitable. However, it’s worth exploring other credit options as well.
1. Collateral Mortgage
Like a regular mortgage but with a pre-approved HELOC, chosen during your initial mortgage application. Allows borrowing to increase with rising home equity.
2. Blended Mortgage
Ideal when interest rates drop below your current rate. Combines a lower interest rate with the option to access home equity, falling between your existing and current lender rates.
3. Personal Loans and Unsecured Credit
For short-term financing, explore personal loans or unsecured credit options to potentially find a cheaper borrowing solution compared to a second mortgage.
Need Extra Cash? Explore Second Mortgages in Canada Today
With a clear understanding of second mortgages, you can decide if it suits your needs. If you’re unsure, reach out to us at 1-855-668-3074 for expert advice or apply online for a quick 24-hour approval. Turnedaway.ca, we get second mortgages approved!
Second Mortgages FAQs
1. What are the drawbacks of obtaining a second mortgage?
Obtaining a second mortgage can have drawbacks:
- Higher interest rates than your primary mortgage.
- Potentially higher costs due to fees.
- Increased risk of default with two lenders if your financial situation deteriorates.
2. How much is the borrowing limit for a second mortgage?
How much you can borrow with a second mortgage in Canada depends on your home’s worth, your first mortgage, and the loan type.
3. What purposes are second mortgages typically utilized for?
Second mortgages are primarily used by homeowners to access their home equity. They can be used for purposes such as paying off high-interest debt, debt consolidation, home renovations, tuition, medical expenses, or investments.
4. What are the consequences if I fail to meet the obligations of my second mortgage?
If you default on your second mortgage, it will be repaid after the first mortgage is settled. The priority in repayment is determined by the order of the loans, with the first mortgage taking precedence.
If there are remaining funds, they will go toward repaying the second mortgage. However, the amount recovered depends on the value of your home; if it’s insufficient, the second mortgage lender may recover a smaller portion.
