Second mortgages are one of many mortgage products available in Canada. Second mortgages can be a bit confusing, and people often have questions about why someone would want this product, and if it’s right for them. While these products are not suitable for everyone, for some homeowners, they can open up a lot of opportunities. It’s important to do some research into these mortgage products before applying for one. Plus, we also recommend contacting a broker to help you understand your options! Here are the basics you should know before getting a second mortgage.
What is a second mortgage?
On the surface, second mortgages seem self-explanatory. It’s literally a second loan on your property, behind your first mortgage that already exists. It comes second in terms of order and in terms of payment, so if you were to default on your mortgage, you would need to pay off your first loan before your second. These loans are taken out using the home equity you have gained with your first mortgage. Just like your first mortgage, your second one requires monthly payments with either a variable or fixed interest rate. Often, people use home equity lines of credit (HELOC) as a second mortgage. A HELOC is a bit like a credit card, meaning you can borrow up to a preset limit, and you make monthly payments to clear out the balance to use it again.
Why would you get one?
Why would you take out another loan against your home’s equity? People who apply for second mortgages may have big financial reasons to do so. Often, these people want to access the home equity to pay for big expenses or projects they are planning. Home renovations and university education, for example, are expensive and cannot always be fully paid out of pocket. Some homeowners also want to consolidate their debt with a second mortgage. Since your home has equity, you can use this loan to access the money you need to finance these expenses.
Do you qualify?
So, who qualifies for a second mortgage? Not every homeowner is automatically able to get a second mortgage on top of their first one. Just like with your first mortgage, you must meet a set of requirements for a second loan. First, you need to have gained enough equity in your home to support this loan, including the monthly payments. Second, you need to consider who your lender will be for the loan. Often, private lenders are the main source of second mortgage funding in exchange for higher interest rates. However, many traditional lenders such as First National, MCAP and Scotiabank now offer second mortgages with similar rates to first mortgages. Of course, it’s important to note you can only get a second mortgage with these lenders if you already have a first mortgage with them.
Things to keep in mind
Timeline
There are a few steps you must take before you can get approved for this product. One of the most important items is securing a home appraisal like you may have done when you got your first mortgage. Lenders need to be sure they are financing a worthwhile asset by knowing the value of your home. Otherwise, they have no assurance your home has enough equity for this loan. This process can take a couple of weeks.
Interest rates
Since your first mortgage requires payments before the second mortgage, there is more risk for a lender to finance a second loan. For this reason, they tend to charge higher interest rates for more assurance on their end. This is also why your credit and income should be in good shape. It can be tricky to find a lender to finance this mortgage product, since it is a riskier move for them and they are second in line behind the first mortgage. Interest rates depend on location, property type, and the loan amount, but they can be anywhere from six per cent to 15 per cent and above, in most cases.
Risk
You must be confident in your ability to support two mortgages. Two loans means double the responsibility for making payments on time, and both mortgages must remain in good standing. In a way, your mortgages depend on one another because defaulting on one puts the other at risk. Before you commit to a second loan, you need to be absolutely sure that you can support the payments.
Your next steps
If you think a second mortgage sounds like something that would suit you and your situation, you should get in touch with a broker to chat about your options. A broker can help you navigate the process and answer any questions you may have, and they can advise you on the interest rates you may be looking at. Brokers provide you with an objective second opinion and can arm you with the knowledge you need to pursue this product.
If you have questions about your mortgage, get in touch with me!