May 31, 2019 SEP Dev

Recent Inquiry – Second Mortgage

Question from caller: “If I get a second mortgage today, and want to refinance in a year, will the second mortgage prevent me from getting a new mortgage from a bank?”

No, simply having a second mortgage will not jeopardize your chances of getting a new mortgage when you’re ready to refinance – second mortgages are not viewed negatively.  In fact, a second mortgage can often improve your chances of getting a new mortgage IF the loan is used wisely. Some reasons why a second mortgage can be a life saver (especially when planning to eventually refinance), are:

  • To consolidate debt to bring down high utilization (private second mortgages do not report to the credit bureau and as such, if the loan is used off to pay off existing high interest balances, your credit score can really improve in a short period of time)
  • To renovate areas of your home to help improve the value (The lower your loan to value, the more appealing your request will be to the bank)
  • To clean up first mortgage arrears and bring your first mortgage back into good standing (when seeking out a new mortgage, having any amount of mortgage arrears can be a deal breaker)
  • Paying out CRA arrears (often, it is hard to refinance through the banks if you owe a significant amount of money to CRA in back taxes)
  • To invest in business ventures that help grow your business/earning potential (this includes schooling to further your career path, help fund a business start up, invest in business growth, etc. How can this possibly be a bad thing?)

Will the bank ask why you initially took out the second mortgage, or what the purpose of the funds was? Sure, they most definitely will ask… and an honest answer will suffice. Will they reject your refinance just because you took the second mortgage to begin with? No, having a second mortgage is not stand-alone ground for refusal of a new mortgage. However, a few important reasons why a second mortgage could hinder your chances are:

  • If the new mortgage you are looking for is out of your affordability range (in other words, the new mortgage, which should be enough to consolidate your existing mortgages, causes your debt servicing ratios to be too high according to bank requirements)
  • If you are in arrears with your second mortgage, or have had poor re-payment history (missed/late payments, NSF’s, etc.)
  • If the exiting mortgages (first mortgage + second mortgage) exceed 80% of the property value (For refinances, the maximum any bank can typically lend to is 80% of the property value. In such a situation, if your existing mortgages are greater than 80% loan-to-value, there is no further room for refinancing)

To sum this topic up, the banks will not refuse to refinance you just because you sought out a second mortgage. Having a second mortgage will also not hinder your credit and in most cases can improve credit since it does not report to Equifax or TransUnion (assuming it is a private mortgage – if it is a second mortgage from an institution, they may report to the bureau). With strategic planning of a mortgage broker, a second mortgage can be arranged with a future refinance goal in mind, taking into consideration both affordability and property value ranges. For more information, call us at (905) 455-5005.

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