More and more homeowners are looking to second mortgages to help to pay for home renovations, emergency expenses or even to consolidate high interest consumer debt. Traditionally, some of my clients would previously look to credit cards or unsecured personal loans to fill in the gap of cash flow when they needed it, but a second mortgage is a valid alternative for borrowing money.
Currently, some of our clients are securing up to 90% LTV on second mortgages depending on their situation and circumstances.
It’s important to remember that a second mortgage does not replace your first mortgage, nor does it break the terms and conditions of your first mortgage.
What is a Second Mortgage?
Some people get a little nervous when they hear the words “second mortgage”. After all, their primary mortgage is (most likely) the largest debt that they have and they may think of a second mortgage as having another debt that is just as big. But this is rarely the case.
A second mortgage is merely a loan (of any size) that is secured by your home equity. We will allow you to borrow 90% of your home equity – but of course, you can borrow much less if you require less.
Reasons to get a Second Mortgage
If you signed the paperwork for your first mortgage at a time when the interest rates were low you likely locked in for a specific period of time – maybe 5 or even 10 years. A second mortgage means you don’t have to break your mortgage, and then be subjected to whatever the current rate is. You can use the equity you’ve built up without compromising the low interest rate you’ve already secured.
Additionally, second mortgages typically use a different lender than your first mortgage does so the options available to you to secure a second mortgage are usually much more open.
Getting a second mortgage is a little different from applying for a first mortgage on a house, for a couple of reasons. A second mortgage is second for a reason: when it comes to collecting the money, if you default on your payments the lender for the second mortgage is in second position behind the primary mortgage lender. This makes a second mortgage a slightly higher risk than your first mortgage, and so with that in mind sometimes the borrowing rate will be a little higher.
While you can use the money you borrow in a second mortgage for any reason you choose, there are some borrowing reasons that are more common than others. Some of the most popular reasons for getting a second mortgage are as follows:
- Consolidating high interest debt – By lowering the overall amount of interest you have to pay on your consumer debt, a second mortgage can help you to pay off your debts more quickly. Alternatively, you may be able to lower your overall payments on your debts so that you can have more money left over at the end of each month and make your financial situation a little more comfortable.
- Home renovations or repairs – Home renovations are often large expenses, and you may not have enough personal credit to make the repairs or renovations that you want. A second mortgage can be a good way of securing the funds you require. Additionally, since certain renovations can add value to your home, borrowing from your home equity often makes sense to finance these renovations.
- Investment capital – If you are starting your own business or require a down payment on an investment property, you will need capital. Going through traditional channels such as a bank can be time consuming and ultimately you may end up getting turned down. Borrowing from your home equity by means of a second mortgage offers a solution.
- Emergency expenses – Sometimes the unexpected can be expensive. If you suddenly need to replace a vehicle or have emergency medical expenses, you might not necessarily have the money on hand to pay for them. A second mortgage can be a good solution.
How much can I borrow with a second mortgage?
The clients we work with typically are able to borrow around 90% of the value of their home equity. If your home is worth $500,000 for example, and you have $200,000 left owing on your mortgage that means you have $300,000 in home equity. If you are approved to borrow 90%, that means you would be able to borrow up to $270,000.
The more equity that you have built up in your home, the more money you will be able to borrow. And what is great about this is that you are constantly accumulating home equity. As you pay down your primary mortgage, you are building home equity. But you are also building home equity as your home increases in value. And as most Canadian real estate markets have been booming over the past several years, you likely have much more equity than you think.
Depending on how much you wish to borrow, the lender may require that you have a home appraisal first – but generally speaking, the amount that you can borrow with a second mortgage can be quite substantial.
We also work with private equity lenders that may be able to lend more money for a second mortgage, depending on the situation. In working with a private lender, you may have to pay a little more interest, but it may still be in your best interest. Additionally, you may be able to get more flexible terms in working with a private lender.
How do I pay off a second mortgage?
When you get your second mortgage, you will still be responsible for paying the first and second mortgage payments on time. Typically, second mortgage payments are made monthly, and you will also have prepayment options like you would on a first mortgage.
Unlike your first mortgage, your second will be signed for a year term at a time. After the year is over, your second mortgage could be renegotiated for another year, or the lender may ask you to pay it in full.
Did you know . . .
- Second mortgage interest rates begin at the prime lending rate, and go up from there?
- The majority of second mortgages offer interest only payments?
- The requirements to qualify for a second mortgage are largely dependent on the equity in your home and not on your income or credit score?
Can I get a Second Mortgage if I Have Bad Credit?
Although your credit rating may play a role in which lenders you can work with and what your interest rate will be, the answer is yes. In most cases you can still get a second mortgage even if your credit has been damaged.
This is because lenders weigh their decision most heavily on how much equity you have in your home and your ability to make your payments – not necessarily on the credit issues that you have had in the past. In fact, we work with a number of specialty lenders that are focussed specifically on helping those with bad credit.
And did you know that getting a second mortgage can actually help you improve your credit?
If you get a second mortgage for the purpose of consolidating your high interest debt, you can lower the overall interest rate you are paying, lower the amount of the payments that you have to make – or possibly both! This can help you to pay off your debts more quickly and make it less likely that you will forget – or not be able to make – a payment.
The result? You get out of debt and in the process, repair your credit score.
Second Mortgage vs. Refinancing vs. Home Equity Line of Credit
Second mortgages as you may know, are not the only means that you can use to borrow money from your home equity. Mortgage refinancing and home equity lines of credit are also options. So you may be wondering what option is the best for you. Ultimately, you should really sit down with a qualified mortgage broker in order to determine this, however, here are a few broad guidelines that you can use.
- Mortgage Refinancing – With this option, you will be breaking your first mortgage and replacing it with another one of a higher amount. The difference will be given to you in cash to use as you please. Mortgage refinancing typically will cost you less in interest than a second mortgage, however you will have to pay a financial penalty for breaking your first mortgage. The amount of that penalty will be lower the closer you are to your mortgage renewal date. So if your mortgage is set to renew in less than a year, mortgage refinancing may actually be a more affordable option than a second mortgage. But if you recently renewed your mortgage, then getting a second mortgage is likely the more affordable option.
- Home equity line of credit – Also known as a HELOC, this is a type of revolving loan that works more similarly to a credit card. It still is secured by your home equity however, once you are approved for a certain credit limit, you can borrow and repay the money as often as you like. Just like with a credit card, you only have to pay interest on the amount that you have actually borrowed – and not the amount you have been approved for. This type of loan is more appropriate for people who have recurring expenses and who have the discipline not to abuse their credit. For larger, one-time loans, a second mortgage is often the better way to go.
Choosing between a second mortgage and a home equity line of credit is generally pretty simple once you know the difference because they are two very different types of loans.
Choosing between a second mortgage and mortgage refinancing however can be more complicated, because you might not really know what the difference in interest will cost you over the term of your mortgage – or you might not know how much of a financial penalty you would have to pay if you were to refinance. This is where working with a mortgage broker comes in who can contact various lenders and run the calculations to help you make a decision that is in your best interests.
Why work with us?
You can definitely apply for a second mortgage with the bank you use for your daily banking, but there are some drawbacks to using just one financial institution.
A bank, or even a credit union, is limited by the products they have in house to offer you. But we work with dozens of lenders across the country and have access to many other options. So there is a much better chance of finding a solution that best suits your needs.
Additionally, some lenders will offer special rates and deals to mortgage brokers only so they would never been known to homeowners on their own. We can get you the best rate possible on the market for your situation.
And when you work with one of our brokers, you can be confident that they are going to assess your situation and develop recommendations that are tailor made for you. If we think that a solution other than a second mortgage is more appropriate for you, we are going to tell you.
We are also going to answer any questions you may have to make sure that you are confident and feel good about your final decision.
Are there restrictions on how I can use the cash from a second mortgage?
What you use your second mortgage for is really up to you: whether you want to renovate and build your dream kitchen, pay off some outstanding debt and ease up cash flow, or maybe you need the cash to clear up a judgment. It’s absolutely your decision.
That being said however, it is important to remember that if you were to default on your second mortgage, you will be putting your home at risk. For this reason, it is highly recommended, that regardless of what you use your second mortgage for – you have a plan and a means for repaying it.
Give us a call today to chat about your needs for a second mortgage! A member of our team will listen to you and answer all your questions. Let’s get started!
Second Mortgage FAQ's
You need to be a homeowner and have equity in your home to qualify for a second mortgage, but the additional conditions will be unique to how much you need to borrow. Allow us to assess your situation and offer a lending solution that makes sense for you.
Many homeowners use a second mortgage to pay off their outstanding creditors, so they can pay back the money at a lower interest rate. A second mortgage can save homeowners thousands in interest. Book an appointment today to see what your options are!
Not specifically but the amount of time you have lived in your home usually plays a role in how much home equity you have – and therefore how much you can borrow.