What is a Second Mortgage & What Do I Need to Qualify?

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Soon, Canadians will have reached historical highs of unsecured debt. Moreover, there are a large number of consumers who are struggling to meet their monthly obligations and are overwhelmed by high-interest debt. Thus, more homeowners are looking for solutions that can alleviate the pressures of a face paced world.

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74% of all Canadian household debt is residential mortgage debt.

Thus, banks continue to be frugal lenders to manage risk and ensure borrows can repay their loans. What does this mean for borrows who want to get a second mortgage?

In this article, you’ll learn everything you need to know about second mortgages and how to get one. Let’s get started.

What Is a Second Mortgage?

two people discussing about second mortgage

A second mortgage (2nd mortgage or home equity loan) is an additional mortgage against the title of your home in the land registry office.

It’s in second position, which means it’s behind your first mortgage or existing mortgage. 

If you default on your mortgage payment or lose your home, the first mortgage takes priority and gets paid off first. 

If you get a second mortgage, you will continue to make your current payments on your first mortgage. But, you’ll also have new payments for the second mortgage. 

You can choose from two different products if you want a second mortgage. They are a home equity loan or a home equity line of credit (HELOC).

A home equity loan is a lump sum of money that the bank deposits into your account. It works the same as your primary mortgage.

But a HELOC functions like a credit card. You can withdraw money from a revolving line of credit.

To research more about second mortgages, send us a message at Turnedaway.ca and we’d be happy to help you. 

How Does a Second Mortgage Work?

A second mortgage allows you to use your home’s equity. So instead of having money tied up in your home, you can use that money for current expenses. 

Second mortgages can offer a great benefit, but they can also create more debt.

Why Would You Take Out a Second Mortgage? 

man is taking out a second mortgage to finance a car

There are several reasons why you would consider taking out a second mortgage. Some of these include:

  • Consolidate debt
  • Eliminate property tax arrears
  • Catch up on missed mortgage payments
  • Stop foreclosure on your home
  • Finance a car
  • Home renovation
  • Pay for higher education
  • Start a business

You may also apply for a second mortgage to avoid paying the penalty to discharge your existing first mortgage.

Discharging a mortgage is what you need to do after you’ve paid off the mortgage to regain the rights to your property from the lender.

If you’re interested in a second mortgage in Ontario, give us a call at Turnedaway.ca for assistance.

Is It a Good Idea To Take Out a Second Mortgage?

A second mortgage works great for some and poorly for others. Thus, you need to assess your situation before making a decision carefully. 

For example, a second mortgage may be an excellent idea if you want to consolidate debt. Second mortgages have lower interest rates than credit cards.

If you have multiple credit card balances on several accounts, a second mortgage can help. 

If you need help covering revolving expenses, HELOCs are a good choice. As long as you keep up with your payments, you’ll have access to revolving credit. 

Plus, HELOCs only charge you interest on what you use. Payments are flexible, so you can choose when to make them. 

Second mortgages are also something to consider if your lender rejects you to refinance your primary mortgage. This will help you save on closing fees. 

What Happens When You Refinance?

Refinancing is different because you keep your original mortgage. You still pay off the amount but replace the loan terms.

If you refinance your mortgage, you still only make one payment a month versus two if you get a second mortgage. 

Some homeowners opt for a cash-out refinance rather than a second mortgage. This gives you a lump sum of equity from your lender in exchange for a higher principal. 

What Is the Downside to a Second Mortgage?

Of course, there are some disadvantages to obtaining a second mortgage too. Since a second mortgage is a new loan, you will be adding another payment to your monthly expenses. 

This could mean you need to dip into your savings. On the other hand, it could also lead to more debt, a poor credit score, or foreclosure if you don’t handle it responsibly. 

Although second mortgages can offer lower interest rates compared to other forms of credit, there are still fees involved with the lending process. These include:

  • Loan origination
  • Appraisal
  • Legals

Fortunately, most of these costs can be built into the financing, meaning there are few up front costs, if any. 

Plus, taking on more mortgage debt means you have less equity in your home. Many find it difficult to even qualify for a second mortgage for several reasons such as:

  • Poor credit
  • Low income
  • Being a new homeowner

Fortunately, there are many lenders willing to overlook these issues, you just have to know where to apply. 

Do Second Mortgages Have Higher Rates?

Yes, 2nd mortgage interest rates are typically higher than primary mortgage rates. This is because a second mortgage comes with more risk for lenders

As mentioned, the first mortgage takes priority in getting paid off. Lenders of second mortgages risk not getting their money back if you default or foreclose. 

But, applying for a second mortgage with a significant amount of equity and health finances will help you get a better interest rate than with unsecured credit products.  

How To Qualify for a 2nd Mortgage

a mortgage broker and a client talks about qualification for a second mortgage

How to get a second mortgage is different for everyone. But, lenders usually look at four criteria to determine if you qualify for a second mortgage.

The first is equity. The more home equity you have, the better chances you have of qualifying for a second mortgage. 

Further, if you’re a new homeowner, paying a larger down payment decreases the lender’s risk. This will give you more equity and more purchasing power in the future.

The second is income. Lenders want to know that you have a dependable source of income that will cover your payments.

The third is your credit score. The higher your credit score, the more dependable a borrower you are. Having a high credit score will get you a better interest rate. 

The last criterion is the property. Lenders want to secure their investment in case you default on your payments.

Again, there are many lenders who are willing to overlook credit and income criteria but you have to work with a broker who specializes in these areas to get an approval.

Where To Get a Second Mortgage?

Not all lenders provide second mortgages since they come with more risk. But there are usually three options you can explore:

  • Your current mortgage provider or major bank
  • Trust company
  • Private second mortgage lenders 

Each type of lender and the individual lenders will have their own criteria and interest rates

You can also look up a second mortgage online from a mortgage lender.

To work with one of the best online lenders, contact us at Turnedaway.ca to explore your options.

The best second mortgage options are different for each person. This is because your specific qualifications determine your eligibility and level of financial responsibility. 

What Is the Average Interest Rate for a Second Mortgage? 

If you secure a second mortgage (HELOC) from a major bank, like the bank you use for your primary mortgage, you will have an interest rate of 2.5%.

However, major banks typically require owners to have at least 25% equity in their homes and a credit score of 650-680 even to consider them. 

A second mortgage from a trust company will have an interest rate ranging from 6-10% . However, you can qualify with a much lower credit score and only 10-15% equity. 

A mortgage from a private lender will have an interest rate ranging from 7 -12%.

The more equity you have the lower your rate will likely be and credit and income are rarely considered a factor of approving a client. 

A lot of homeowners are nervous to work with a private lender. Truth be told, they operate almost exactly the same way a bank or trust company does. 

In fact, they have the same legal rights when it comes to clients who miss payments or don’t pay their property taxes. 

The only real difference is that they have higher rates than banks but are also much more flexible. 

To speak with a private lender about a second mortgage in Toronto, reach out to Turnedaway.ca.

Can You Get a Second Mortgage With Bad Credit or When Not Working?

middle aged man shaking hands with a financial advisor during a consultation about second mortgage with bad credit at home

It’s not impossible to get approved for a second mortgage with bad credit or when you’re not working, but it comes with a financial responsibility.

That said, if you’re in this situation, a second mortgage isn’t always a bad idea. This is especially true if you’re trying to consolidate your debt to pay it off.

In fact, Turnedaway.ca offers specialty 2nd mortgages that are prepaid for up to one year. 

By capitalizing or adding the payments onto the loan, the homeowner has 0 payments to make.  This gives individuals who are not working time to find employment or get back to work.

Before agreeing to any loan terms, you want to ensure you have a repayment plan that you can stick to. Avoiding a default at all times to vital to ensuring you build your home equity and credit score.

How Much Can You Borrow for a 2nd Mortgage?

Lenders use the total value of your property to determine how much you can borrow for your second mortgage.

First, they multiply the property value by the maximum borrowing amount, then minus the mortgage left. 

Here is an example. Your home’s value is $500,000, and your maximum borrowing amount is 85%. You have $200,000 left to pay on your mortgage. 

500,000 x .85 = 425,000 – 200,000 = 225,000

You can borrow $200,000 for a second mortgage. The maximum borrowing amount will vary from lender to lender and city-to-city. 

To be clear, the likelihood of getting 85% of your homes value in Timmins may be more difficult to get than if you lived in Ottawa or another major city.  The more populated a city, the more aggressive lenders tend to be. 

If you’re still wondering, “How much can I get approved for a second mortgage?” you can get a great idea by using our home equity calculator

Can You Combine Two Mortgages?

Holding two mortgages instead of one is always more work. But, if you decide to take out a second mortgage, you may be able to combine them into one eventually.

Before consolidating loans, you’ll want to do some math to ensure you’ll save money.

It’s best to speak with several lenders about mortgage consolidation before you take action to ensure you get an interest rate and conditions you’re happy with. 

Home mortgage consolidation is complex, so working with professionals is a must.

couple secure a second mortgage

Secure Your Second Mortgage Today

Getting a second mortgage is one of the easiest products to get approved for and they are extremely versatile. 

They can be used for just about anything and arranged quickly if you work with an experienced mortgage broker. Take your time making this decision to ensure it’s right for you. 

If you want more information about getting a second mortgage in Canada, contact us at Turnedaway.ca.

We are on a mission to help all Canadians get mortgage financing approval regardless of their financial situation. 

 

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