A second mortgage is a loan that’s secured against the equity you’ve built up in your home. As the name implies, a second mortgage is placed behind a first – or primary – mortgage, meaning it’s an additional loan on a property that’s already mortgaged.
Second mortgage rates tend to be higher than first mortgage rates because they pose a greater risk to lenders. If, for instance, you were to default on your mortgage or have your home go into foreclosure, the priority for repayment would be to the first mortgage. Repayment of the second mortgage will only occur once the first mortgage is completely paid. Still, second mortgage rates will generally still be lower than those of a credit card or even a personal (unsecured) loan.
How does a second mortgage work?
As with a first mortgage, you’ll need to qualify for a second mortgage and demonstrate that you can make the new payments. The amount for which you qualify depends on how much equity you’ve built up in your property as well as the outstanding amount on your first mortgage. While your lender will also want to confirm your employment, income, credit score and other debts, for the most part, the lender will approve a second mortgage strictly based on equity as opposed to your credit or income.
It’s also important to note that you’re not required to obtain your second mortgage from the same lender where you received your first mortgage, so you have many options available to meet your needs when securing a second mortgage in Canada.
You can generally borrow up to 85-90% of the appraised value of your home, minus the balance on your first mortgage. While you pay off your second mortgage, you also need to continue paying your first mortgage.
What’s a home equity loan?
A second mortgage can also be in the form of a ‘home equity loan’, which represents a lump sum payment. In other words, a home equity loan is a type of second mortgage where you take out the total amount you intend to borrow in one lump sum and pay it back in monthly installments like a mortgage.
Using a second mortgage to access home equity
There are a number of reasons why you may wish to access the equity in your home through a second mortgage. Following are five of the most common reasons:
- Debt consolidation – pay off high-interest debt, increase cash flow and manage one affordable monthly payment
- Home improvements – increase the value of your home through renovations or building an addition
- Buying Property – use the money towards a down payment or for the purchase of an investment property
- Emergency Funds – have peace of mind should you experience unexpected life changes (long-term illness, job loss, etc)
- Tuition – help cover the cost of your children’s education
The decision of whether to take out a second mortgage is not to be taken lightly. You need to understand how it works, how you qualify, how it affects your finances and whether it’s the best course of action for you based on your specific needs.
Arash Sef will ensure you receive all of the information required to help you make a wise and informed decision – whether you opt for a second mortgage or another means to tap into your home equity.
Have questions about whether a second mortgage is right for you or regarding your mortgage in general? Answers are a call or email away.