A second mortgage is a mortgage that is taken out against a property that already has a home loan (mortgage) on it. Generally, people take out second mortgages to satisfy short-term cash or liquidity requirements, have an investment opportunity, need money for home renovations, or to pay off higher-interest debts (such as credit cards, student loans, or outstanding Revenue Canada taxes).
If you are considering a second mortgage, here are a few key points to keep in mind:
Second Mortgages and Home Equity: Your second mortgage and what you can qualify for hinge on the equity that you have built up in your home. Second mortgages typically allow you to access up to a max of 80% of the home value; very few lenders will consider a second mortgage over 80% of the home value.
For example, if you are seeking an 80% Loan-to-Value loan (“LTV”):
House Value: $850,000
80% LTV (maximum mortgage amount): $680,000
Minus: First Mortgage ($550,000)
Amount Available Through Second Mortgage: $130,000
Second Mortgages and Interest Rates: When it comes to a second mortgage, these are typically higher-risk loans for lenders. As a result, most second mortgages will have a higher interest rate than a typical first mortgage. There is also the option of working with alternative and private lenders depending on your situation and financial standing. Keep in mind, typically lenders who offer a second mortgage are private lender MICs (Mortgage Investment Companies) – in addition to some trust companies and credit unions. For major banking institutions, you would need to hold your first mortgage with them to be considered for a second mortgage such as a Home Equity Line of Credit.
Second Mortgage Payments: One advantage when it comes to a second mortgage is that they have attractive payment terms. For instance, you can opt for interest-only payments, or you can choose to pay the interest plus the principal loan amount. In many cases, second mortgages are completely open and can be paid off at any time without a penalty. Work with your mortgage broker to discuss options and what would work best for your situation.
Second Mortgage Additional Fees: A second mortgage often comes with additional fees that you should be aware of. These fees can vary widely but often are a percentage of the mortgage and can often be included in the second mortgage so there are little out-of-pocket costs. Other fees to consider include appraisal fees, legal fees, and lender and/or broker administration fees (particularly with alternative or private lenders).
Second mortgages are a great option for many homeowners and, in some cases, may be a better solution than a refinance of your entire mortgage. If you are interested in learning more or want to find out if a second mortgage is right for you, at Skip The Bank, we can help!