Can a second mortgage affect your ability to refinance in Ontario? Here’s what you need to know.
Question from caller: “If I get a second mortgage in 2023, and want to refinance in 2024, will the second mortgage prevent me from getting a new mortgage from a bank?”
If you’re considering getting a second mortgage and wondering how it might impact your ability to refinance in 2023 or 2024, rest assured that having a second mortgage alone will not jeopardize your chances of obtaining a new mortgage from a bank. In fact, a second mortgage can improve your prospects for refinancing if used wisely. Here are some key points to consider:
Debt Consolidation: A second mortgage can be used to consolidate high-interest debts, which can lead to an improved credit score in a relatively short period. Private second mortgages do not typically report to credit bureaus, making them a viable option for reducing debt utilization.
Home Renovations: Using a second mortgage to fund home renovations can increase your property’s value. When seeking a refinance, a lower loan-to-value ratio makes your application more appealing to banks.
Addressing Mortgage Arrears: If you have fallen behind on your first mortgage payments, a second mortgage can help bring it back into good standing. Mortgage arrears can be a deal breaker when applying for a new mortgage, so addressing arrears is crucial.
Settling Tax Arrears: Significant outstanding tax debts owed to the Canada Revenue Agency (CRA) can make it challenging to refinance through traditional banks. A second mortgage can provide the funds needed to pay off these arrears, increasing your chances of obtaining a new mortgage.
Business Investments: Investing in business ventures or furthering your education to enhance your earning potential can be beneficial. A second mortgage can provide the necessary capital to support these endeavors.
While banks may inquire about the purpose of your second mortgage funds, being transparent about your intentions is generally sufficient. Having a second mortgage does not automatically disqualify you from refinancing. However, there are a few factors that may hinder your chances:
- Affordability Range: If the new mortgage you are seeking pushes your debt servicing ratios beyond the bank’s requirements, it may be deemed unaffordable, potentially impacting your refinance application.
- Poor Repayment History: Defaulting or consistently making late payments on your second mortgage can raise concerns for lenders and diminish your chances of refinancing.
- Loan-to-Value Exceeding 80%: Most banks cap refinancing at 80% of the property value. If your existing mortgages (first and second) already exceed this threshold, there may be limited room for further refinancing.
In summary, banks will not typically refuse to refinance based solely on the existence of a second mortgage. Moreover, a second mortgage generally does not negatively impact your credit since it may not be reported to credit bureaus (this applies primarily to private mortgages, while institutional second mortgages may be reported). By working with a knowledgeable mortgage broker who considers affordability and property value ranges, you can strategically plan a second mortgage in 2023 with the goal of future refinancing in mind. For more information or assistance, feel free to contact us at (905) 455-5005.