Second Mortgage on a Cottage

You probably know that as a homeowner, you’ve got a significant source of borrowing power in the form of your home equity. But what many people may not realize, is that – if they own a second property such as a cottage – that they also have borrowing power in the equity that has been accumulating in that property.

Over the past several years, the value of the cottages have increased significantly across Canada. So if you own a cottage and need to borrow cash, getting a private second mortgage on your cottage can be a good solution.

What is a second mortgage on a cottage?

To answer this question, we must address both what is a private mortgage and what is a second mortgage.

A private mortgage is when a mortgage lender is either a private company or an individual as opposed to a traditional lender such as a federally regulated bank. People often choose private lenders when they cannot qualify with a bank. Since private lenders do not have to adhere to the same strict regulations as banks, they have more flexibility to look at the bigger picture and offer loans that homeowners might not otherwise be able to get.

A second mortgage is when the homeowner – or in this case, the cottage owner – borrows from the equity in the property. So for example, if the owner’s cottage is worth $1 million and they still owe, $500,000, then the amount of equity in the property would be $500,000. With a private second mortgage, they would be able to borrow up to 90% of that amount – or $450,000

So a private second mortgage on a cottage is a loan secured by the equity in your cottage that is offered by a private lender.

Advantages of getting a second mortgage on your cottage

If you own a cottage, then getting a second mortgage on it, can be a good way of borrowing a large sum of money at an interest rate that is relatively low compared to other types of loans. You may choose to borrow against your cottage if you do not have sufficient equity in your primary residence, or you may feel more comfortable with a loan secured to your cottage as it does not put your primary residence at risk.

Advantages of borrowing from a private lender.

While borrowing from a traditional lender will typically get you a lower interest rate than borrowing from a private lender, there are a number of reasons why you may prefer – or need – to opt for a private lender. These reasons include:

• Private lenders rely less on credit score – when you apply for a second mortgage on your cottage with a traditional lender, your credit score and debt to income ratio will play a major role in whether or not you are approved for the loan. Private lenders, however have more flexibility to look at other factors. In fact, there are speciality lenders that work specifically to help people who have bad credit or who are self-employed.

• Quick approval process – If you are in need of a faster than usual approval for the second mortgage on your cottage, then you may be better off working with a private lender.

• Customized terms – If you have specific requirements for the terms of your second mortgage, a private lender may be better able to accommodate you.

How does a private second mortgage on your cottage work?

Once you are approved for a second mortgage on your cottage, you will receive the cash loan to do with as you wish. You then repay the loan just as you do your primary mortgage.

The mortgage is paid each month with part of the payment going toward the principal and part of the payment going toward the interest. This is done for the length of the term of the mortgage. At the end of the mortgage term, you will have the option to either pay off the balance of the mortgage or renew it with the lender.

What are some reasons people might choose to get a second mortgage on their cottage?

There are a variety of reasons why a cottage owner might choose to get a second mortgage on their property. A few of these reasons are:

• It is a way for them to borrow a large sum of money without putting their primary residence at risk in the event of a default.

• They do not have sufficient equity in their primary residence to borrow from it.

• A second mortgage has a lower interest rate than many other types of loans.

• They are financing a large project such as a renovation to their cottage.

• They require a down payment on another property.

• They require seed capital for starting a business.

• They require money for any large expense.

Is getting a second mortgage on my cottage the only way to access its equity?

No. There is also the option of refinancing the mortgage on your cottage. Refinancing is different than a second mortgage in that it requires you to break your first mortgage. The main advantage of refinancing is that the interest rate on the loan is usually a little lower. The drawback however is that because you are breaking the first mortgage, you will have to pay a financial penalty. Depending on how much of a financial penalty you must pay to refinance, it is often a better choice to get a second mortgage instead – even if you do have to pay a slightly higher interest rate.

To determine whether it makes more financial sense for you to refinance or to get a second mortgage on your cottage, it is best that you sit down with a professional mortgage broker. Your broker has the software to run the calculations necessary to determine what type of equity loan makes the most sense for you.

How do I get a second mortgage on my cottage?

The best way to get a second mortgage on your cottage is to start by contacting your mortgage broker. Your broker will assess your needs and circumstances and give you a good idea of how much of a loan you are able to qualify for.

They will then get you pre-qualified with a lender and give you a checklist of any financial documents or information that will be required. They will also advise you on whether it’s likely that you will require an appraisal on your cottage. (If you do, they will help you with this).

Once you’ve gathered the necessary financial information, and filled out the application, you should hear back from the lender fairly quickly on whether or not you have been approved for a second mortgage on your cottage.

Once you are approved, you will receive the cash in the form of a cheque or a direct deposit to your bank account.

Why should I work with a mortgage broker to get a second mortgage on my cottage?

Yes, it is possible to go directly to a private lender and get a second mortgage on your cottage. That being said however, it is highly advised that you work with a professional mortgage broker instead. Some of the reasons why you should work with a mortgage broker include:

• They can help you determine whether a second mortgage on your cottage really is the best choice – while a second mortgage beats a mortgage refinance for many cottage owners, this is not universally true. A mortgage broker can help you determine whether a second mortgage or mortgage refinancing for your cottage makes more sense.

• Mortgage brokers can help you get the best interest rate – because mortgage brokers know the industry and they have connections with many different lenders, they are able to shop around on your behalf to help ensure that you get the best possible interest rate.

• Get approved even with bad credit – mortgage brokers work with a number of speciality lenders – so if your credit isn’t perfect, they will be able to find the lender best suited to help you.

• Ensure all your paperwork is complete and accurate – mistakes in paperwork can lead to unnecessary delays. When you work with a mortgage broker, they will doublecheck everything to help ensure that your application doesn’t get sent back for missing or inaccurate information.

• Assistance with your appraisal – depending on how much equity you wish to borrow from your cottage, the lender may require that you get your property appraised. Your mortgage broker can assist you in arranging this.

• You’ll have a coach who can answer all of your questions – getting a second mortgage on your cottage is a big commitment and you will likely have questions throughout the process. A mortgage broker is someone who can work alongside you and answer your questions so you can feel confident that you are making the right choice.

Overall, getting a private second mortgage on your cottage can be a good way to borrow money when you need it. If you have a cottage, chances are you’ve got considerable equity in it – so before you opt for a higher interest loan option, it’s a good idea to sit down with your mortgage broker to discuss getting a second mortgage on your cottage.