Frequently Asked Questions About Second Mortgages
Who can apply for a second mortgage in Canada?
The requirements for a second mortgage in Canada are much like the requirements for a first mortgage. The borrower needs to be a Canadian resident of age of majority, have sustained income, proof of employment, a certain level of equity in the home being mortgaged, and must pass the lender’s credit score and financial history checks. The more equity you have in the property being mortgaged, the better your chances of approval.
What can a second mortgage be used for?
A second mortgage is a way to access a large pool of cash at a relatively low interest rate, and unlike a first mortgage, funds released through this kind of loan are not tied to the property being mortgaged. You can use funds from a second mortgage for a wide range of purposes, including: debt consolidation, home renovation and repair, paying expenses such as tuition fees and medical bills, to fund business ventures and other real estate investments, to aid with cash flow issues, and so on. There really aren’t any limits on what you can use this money for.
How much money can I borrow via a second mortgage?
The amount you can borrow via a second mortgage depends on a few factors: your credit score, your income level, your existing amount of debt, the value of the property being mortgaged, the amount of equity you have in that property, and the value of your first mortgage. Generally, Canadian lenders will allow up to 80% of a home’s value to be borrowed. This means that if you calculate 80% of your home’s value and minus the amount of your existing mortgage, you can get a rough idea of your maximum remaining borrowing room.
Can I get a second mortgage if I have bad credit?
It is possible to get a second mortgage with bad credit, although it may be harder to get approval or more expensive overall. Credit scores are always an important factor in determining loan eligibility, and those with higher credit scores have an easier time qualifying, and are likely to access more competitive interest rates. But while it’s true that some lenders have a minimum credit score threshold that borrowers must meet, other lenders do not have this stipulation, and are able to offer affordable options to those with a chequered financial history. You may have to pay higher interest rates though, or be required to have more equity in the home to qualify.
What’s the typical interest rate on a second mortgage?
Interest rates on second mortgages vary depending on the borrower’s financial position – their credit score, amount of equity in the home, income levels, value of the first mortgage, etc. Interest rates are also affected by each individual lender’s policies and the term of the mortgage. Both fixed rate and variable rate second mortgages are possible. In Canada, the range is roughly between 2% and 15%, with the average sitting at around 6.5%.
What’s a good alternative to a second mortgage?
There are a few alternatives to a second mortgage. The first is a reverse mortgage. This option is available to those approaching or in retirement, aged over 55, and with equity in their home. A reverse mortgage differs from a second mortgage in that there are no monthly payments – the balance of the mortgage and all interest is paid off once the home is sold. Up to 55% of the value of the home is available in tax-free cash via this route.
Another alternative is a home equity line of credit (HELOC). This is like a traditional line of credit, but is secured against the equity in your home. While a second mortgage provides access to a fixed lump sum, at a set fee and over a set term, a HELOC is more flexible. You can draw out any amount up to the maximum allowed, and you only pay interest on what you actually borrow. You can make multiple withdrawals, at any time during the life of the loan. In this way, a HELOC is more like a credit card, but with lower interest rates and higher borrowing amounts.
How does a second mortgage affect my original mortgage?
A second mortgage will not affect your original mortgage in any way. As a second mortgage is procured after the first, the original mortgage is still the primary mortgage on the home, and all of its terms remain the same.
Will a second mortgage hurt my credit?
Taking on any form of debt has an effect on your credit, although this does not necessarily have to be a negative effect overall if you make all your payments. Generally speaking, the higher your level of debt, the lower your credit, as you are considered more leveraged and therefore a greater borrowing risk. So when you first take out a mortgage, your credit suffers. However, if you prove your ability to pay back the loan with timely payments, this can actually help your credit score in the long run, as it establishes a pattern of debt repayment and reliability.
Where can I get a second mortgage from?
Second mortgages can be found at lenders of all types, including traditional banks and credit unions, other financial providers, and online lenders. The stringency of each provider’s eligibility requirements varies; banks are usually quite strict, while online lenders tend to be more flexible. However there are exceptions. The higher your credit score and the more equity you have in your home, the more options you will have in terms of lenders. There is no requirement to get a second mortgage from the same lender as your first mortgage, so you can shop around for the best deal.
What kind of property can I get a second mortgage on?
Most personally-owned properties are eligible for a second mortgage (assuming the owner meets the lender’s equity, income and credit requirements). This includes newly constructed homes, residential dwellings of any age, multi-unit properties, and so on. For business properties, second mortgages are also available under similar terms. The only significant restrictions are that the property in question must have an estimated economic life of at least 25 more years.