November 30, 2022 SEP Dev

Second Mortgages in Canada: Everything You Need To Know

What is Home Equity?

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.

 

What is 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.

(905) 455-5005.

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