How to Get a Second Mortgage in Canada?
A second mortgage in Canada is an additional loan secured against a property that already has an existing mortgage. While it can help access cash from your home’s equity, it also means managing two loan repayments at once — and there’s a risk of losing your house if you’re unable to keep up with payments.
To reduce the risks associated with second mortgages, educating yourself as much as possible about them is essential.
How does a second mortgage in Canada work?
If you want to understand how a second mortgage operates, it’s useful to gauge the amount of money you can access. This figure is based on the equity in your home. The maximum you can borrow is typically up to 80% of your property’s value after subtracting your existing mortgage balance.
For instance, if your home is currently valued at $500,000 and you have no existing mortgage, you could borrow up to $400,000 with a second mortgage (calculated as $500,000 multiplied by 0.8). However, if you still owe $300,000 on your first mortgage, your second mortgage cannot surpass $100,000 (computed as $400,000 minus $300,000).
Where to get a second mortgage in Canada?
Two main types of second mortgages are home equity loans and home equity lines of credit (HELOCs). While most major financial institutions provide HELOCs, securing a second mortgage requires approaching a private lender or seeking advice from a mortgage broker.
Interest rates and fees on second mortgages
When you go for a second mortgage, you’re introducing another lender to the property title. This entails several fees to take into account, such as:
- Legal fees
- Title search fees
- Appraisal fees
- Administration fees.
Moreover, the interest rate is usually higher compared to your primary mortgage. The second mortgage lender assumes a subordinate position on the property title, meaning that if you default and your home is sold, the primary lender is paid first. The second lender faces increased risk; hence, they charge a higher interest rate.
How to qualify for a second mortgage in Canada?
As a second mortgage is an additional loan, you must meet eligibility criteria before approval. Lenders will assess the following information:
- You must furnish details of your primary mortgage to allow the second mortgage lender to assess the amount of equity you possess.
- Verification of income. An employment letter or recent pay stubs can demonstrate to lenders that you have stable employment and sufficient income to afford a second mortgage.
- Credit score. During the qualification process, lenders will review your credit score. Typically, the higher your credit score, the more favorable loan terms you can expect to receive.
- Property valuation. You’ll require a home appraisal to assess the property’s current value.
Advantages and Disadvantages of Second Mortgages
Just like with any other credit product, weighing the pros and cons of a second mortgage before applying for one is essential.
Advantages:
- You can tap into as much as 80% of your home’s appraised value.
- The unlocked equity can be utilized for various purposes, such as unforeseen expenses, home renovations, and debt repayment.
- Certain lenders might offer qualification options even if you have poor credit.
Disadvantages:
- Having two lenders means you’re at a higher risk of default if your financial situation deteriorates.
- They can be more costly than other options due to the associated fees.
You might face a considerably higher interest rate compared to your first mortgage.
What are the alternatives to a second mortgage in Canada?
If you require cash and can manage the additional expenses, a second mortgage might be a suitable option. However, it’s essential to explore other credit products that may also be worthwhile.
Collateral mortgage
A collateral mortgage combines a traditional mortgage with a pre-approved Home Equity Line of Credit (HELOC). As your home equity grows, so does the borrowing limit available to you.
Unlike a HELOC, a collateral mortgage must be selected during your initial mortgage application. It’s not a flexible option that can be chosen midway through your mortgage term.
Blended mortgage
A blended mortgage is favored by homeowners when interest rates drop below their current rate. Opting for a blended mortgage often results in a lower interest rate and offers the chance to tap into your home equity. These options can enhance the status of your cash flow.
The rate you receive typically falls between your current mortgage rate and the current rates offered by your lender, which is why it’s termed “blended.” By technically retaining your mortgage, you can sidestep prepayment fees.
Unsecured lines of credit and personal loans
In certain situations, an unsecured form of credit might be more suitable for your short-term financing requirements.
For instance, if a second mortgage from a private lender entails a 12% interest rate over the next 12 months, it’s worth considering your line of credit alternatives or personal loan to see if a more affordable borrowing option is available.
When evaluating credit products against second mortgages, do so thoughtfully. Select the product that offers the lowest total cost and a repayment plan you can adhere to.
Securing a Mortgage for a Second Home
Obtaining a mortgage for a property that isn’t your primary residence differs significantly from securing a second mortgage. With a second mortgage, you have two loans on the same property. However, when purchasing a second home, each property has its own mortgage.
If you purchase a second property, you’ll need to apply for a new mortgage specifically for that property. You’ll need to qualify, pass the mortgage stress test, and provide a down payment of not less than 20%.
Your initial home can influence your new mortgage by boosting your assets, affecting your debt service ratios, and possibly contributing to your down payment funds. However, securing a new mortgage doesn’t necessarily equate to having a “second mortgage.” It simply signifies that you now possess two homes, each with its respective mortgage.
Frequently Asked Questions About Second Mortgages
Is it advisable to get a second mortgage?
A second mortgage is advisable only if you’re sure you can repay it without harming your financial stability. These mortgages often carry high interest rates and, depending on the lender may have short and restrictive repayment terms that can be challenging to manage, particularly if you’re already facing financial constraints.
Is a second mortgage similar to a home equity loan?
Absolutely. A home equity loan is a second mortgage since it’s secured by a property that already has a mortgage on it. The other primary type is a HELOC.