Second Mortgages

Have you ever thought about getting a second mortgage in Canada? If not, today is the day to consider tapping into your home’s equity to get the necessary funds for home renovation, debt consolidation, or covering other large expenses. At The Mortgage Advisors, we can help you learn more about 2nd mortgages and whether they are the right choice for you.

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What is a Second Mortgage?header decoration

Second-charge mortgages are often called second mortgages as they have second priority behind your first mortgage. This loan uses the equity in your home as security, meaning the lender has a claim on your property if you fail to repay the loan.

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There are several reasons why a second charge mortgage might be worth considering:

  • If you’re struggling to get approved for a secure or unsecured personal loan – perhaps because you’re self-employed.
  • If your credit rating has declined since borrowing your first mortgage, remortgaging could mean you end up paying more interest on your entire mortgage balance, rather than just on the increase or extra amount you need to borrow.
  • If your mortgage has a high penalty to break mid-term, it might be a cheaper option for you to take out a second mortgage.
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How Does a Second Mortgage Work?

A second mortgage involves taking out additional equity from your home and shares many steps and approval criteria with a standard first mortgage

The application process for a second mortgage involves the following steps:

  1. Check how much equity you have in your home.
  2. Research lenders, comparing interest rates, fees, and terms offered by different financial institutions.
  3. Provide supporting documentation and submit your application.
  4. The lender will arrange your home’s appraisal to confirm its value.
  5. The lender will then run a credit check.
  6. Finally, the lender will make their approval decision.
  7. If approved, you will be able to sign the mortgage agreement and receive the funds.
A scale with a bag of money on one side and a home graphic on the other to demonstrate what a home equity loan is

Approval Criteria

The approval criteria for a second mortgage include:

  • Sufficient equity in the property (usually at least 15-20%)
  • A good credit score (typically 620 or higher)
  • Proof of steady income to ensure repayment ability
  • Acceptable debt-to-income ratio (typically under 43%)
  • A property appraisal to verify home value

Repayment Terms

Common repayment periods for second mortgages range anywhere from 1 to 3 years, typically these are short-term solutions. Interest rates for second mortgages can vary depending on the lender, property and application type.

Benefits and Risks of a Second Mortgageheader decoration

While second mortgages offer a plethora of advantages, it is important to have a full understanding of your financial situation and repayment capability before you submit your application.

Advantages of a Second Mortgage

Second mortgages offer an excellent option for accessing home equity to finance major expenses, from home renovations to debt consolidation. While second mortgages have higher interest rates than primary mortgages, they are still less expensive than personal loans or credit cards. Plus, the interest paid on a second mortgage may be tax-deductible, offering additional benefits for homeowners.

Disadvantages of a Second Mortgage

Second mortgages usually have higher interest rates as they come with higher risks to the lender. Although a second mortgage can prove to be very useful when you need a lot of cash quickly, be aware that, like any other loan taken against an asset, it puts that asset at risk. If you are unable to keep up with your payment obligations, the lender will have to resort to foreclosure, and you could end up losing your home.

How to Get a Second Mortgage in Canada

If you are looking to get a second mortgage in Canada, the first step should be to contact a professional mortgage broker, such as The Mortgage Advisors. At no additional cost to you, your mortgage broker will act in your interest, providing expert advice, researching the best lenders and mortgage products, and facilitating the entire second mortgage application process.

Using a Second Mortgage to Buy Another House

A second mortgage in Canada can be an invaluable tool for those looking to invest in real estate or purchase another home. By taking out a second mortgage, you will be able to tap into your existing equity, providing instant funding to use as a downpayment on a rental property or another type of real estate investment.

In addition, a second mortgage can be used to purchase a new home even before you sell your existing one, providing bridge financing for the time being.

Frequently Asked Questions about Second Mortgagesheader decoration

No. While a HELOC can be put on as a second mortgage, HELOCs are generally more difficult to qualify for. Here are some other key differences:

  • HELOC funds can be accessed at any time to draw and pay back. The balance is always available, and minimum payments are interest-only based on the prime rate.
  • Second mortgages are generally short-term solutions with fixed rates and payments where you receive a one-time lump sum upon closing.

Second mortgage interest rates can vary from lender to lender and depending on market conditions. As a rule of thumb, expect second mortgage interest to be less than the interest on a personal loan but higher than the interest on your first mortgag

You can borrow up to 80% of the appraised value of your home, minus the balance of your mortgage.

If you have enough equity in your home, a second mortgage can be a viable option even with poor credit.

Because you are using your home as collateral, there is always the risk of foreclosure: if you fail to make your mortgage payments, the lender can foreclose on the property to cover the balance.

Get in touch with The Mortgage Advisors to start your second mortgage application.

Many times, you will be able to get the funds as quickly as 1 to 2 business days after your application has been approved.

You will be able to make regular payments through your lender’s online banking system with pre-authorized debits.

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Still not sure how a second mortgage works or whether you need one? Get in touch with The Mortgage Advisors today to receive free personalized advice.

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