First, let’s talk about home equity. In Canada, home equity can be extremely useful to help push homeowners forward financially or pull homeowners out of a financial bind. Luckily (in Ontario especially) homeowners will gain appreciation in their home as time passes, creating a substantial amount of unrealized equity. Home equity is the difference between the current value of your home and the remaining balance on all mortgages secured against the home. (Value – mortgages = equity).
Accessing that equity for home renovations, debt consolidation or further investing are just a few reasons why a homeowner might choose to apply for a second mortgage.
Now, let’s talk about second mortgages. A second mortgage is a secured loan against your home, behind an existing first mortgage. It’s registered in the second position, hence the term ‘second mortgage’. Like your first mortgage, a second mortgage will have its own monthly payment, separate from your first mortgage. This payment is often made via post-dated cheques or pre-authorized debit.
How do I know if I need a Second Mortgage?
A second mortgage isn’t always the best option. Often, it might be an option you only consider after exploring a mortgage refinance. The suitability of a second mortgage varies but is usually most applicable in situations where the banks/lenders refuse to lend you the money you need.
How much can I get?
Second mortgage lenders in Canada will often let you borrow up to 85% of your property value (minus your existing mortgage balance)
Types of Second Mortgages:
Second mortgages come in two forms: A home equity loan (standard private second mortgage) or a home equity line of credit (HELOC).
Where do I get a Second Mortgage?
Unless your bank is willing to give you a HELOC, you will need to seek out assistance from a Mortgage Broker in order to arrange a second mortgage. Banks offer HELOC’s usually behind their own mortgage. For example, you have a mortgage with Bank ABC, and want a HELOC from Bank ABC – this is likely. However, if Bank ABC says no, then what? Mortgage brokers have established relationships with many banks, monoline lenders, credit unions and alternative lenders – all of whom might be willing to lend you the second mortgage you need.
What are the most common reasons to get a second mortgage?
Common reasons to get a second mortgage might be (but are not limited to):
- Consolidate high-interest debt
- Pay tax arrears to CRA
- Complete home renovations
- Pay for school
- Avoid filing for bankruptcy or a consumer proposal
- Pay mortgage arrears
- Avoid Power of Sale (also known as foreclosure)
- Supplemental income during a difficult time
- Cash for a new or existing business
- To purchase an investment property or vacation home
What are some pros and cons of second mortgages?
Pros:
- Lower interest rates than credit card debt
- Quick turnaround (as little as 3 business days)
- Less stringent on qualifications
- Less supporting documents needed
- Bad credit acceptable
- Pre-payment options to reduce monthly payments
Cons:
- Higher interest than your first mortgage
- Interest-only payments
- Shorter terms (typically 1 year at a time)
- Higher closing costs
- Must be an exit strategy
How do I pay out my Second Mortgage at maturity?
Exit strategies are important. As such, taking a second mortgage without knowing how or when you’ll likely pay it off is a bad idea. There are a few ways to pay out your second mortgage:
- Refinance, and consolidate it with your first mortgage
- Sell your home (only if this was already in the plans)
- Replace it with a HELOC from the Bank
- Replace it with a second mortgage from a different lender
- Pay it out in full from your own funds
What risks do I face by taking out a second mortgage?
Any mortgage will have a certain level of risk, and second mortgages are not risk free. Similar to your first mortgage with the bank, a second mortgage can incur fees and penalties and faces the risk of non-renewal at maturity. Of course, every one of these is a consequence of an action taking place (missed/late payments, arrears, removals of home insurance, default, etc.).
For more information and trusted guidance on second mortgages, you can reach us at (905) 455-5005.