What is a second mortgage?
A second mortgage is an additional loan taken out on a property that is already mortgaged. For the lender, this is more risky than the first mortgage, because they are in second position on your property’s title. If the homeowner defaulted on their payments and the property was taken into possession, the lender in first position would always be paid out first, whereas the lender in second position runs a higher risk of not being paid out in full. To compensate for this additional risk, mortgage rates for second mortgages are always higher than for principal mortgages.
For individuals with an existing mortgage, who have good credit and more than 20% equity in their homes, the most affordable second mortgages will be in the form of a home equity line of credit (HELOC). However, if the homeowner has weaker credit and/or little equity in their property, a second mortgage through a trust company or private lender would be required.
| Lender | Example Company | Product | Interest Rate | Credit Score | Minimum Equity |
|---|---|---|---|---|---|
| Major Bank | TD Bank | HELOC | 2.5% | 650-900 | 25% |
| Trust Company | Home Trust | 2nd Mortgage | 15% | 550-700 | 10-15% |
| Private Mortgage Lender | John Smith | 2nd Mortgage | 10% | Less than 600 | 10% or less |
Why may I need a second mortgage and how do I qualify?
A second mortgage can be a great way for homeowners to consolidate debt. Though second mortgages often carry higher interest rates than first mortgages, these rates are still often lower than high interest credit cards, car lease payments or unsecured lines of credit. Second Mortgages can help you rid high interest debt and improve your credit score.
You can pay off:
– Leins on property
– CRA – GST/HST Tax Arrears
– Mortgage Arrears
– Debt Consolidation
– Judgements
– Consumer Proposal
– Property Tax Arrears
– Children’s Education
– Home Renovations
In order to qualify for a second mortgage in second position, lenders will look at four areas:
• Equity – The more equity you have available, the higher your chances of qualifying for a second mortgage will be. If you are purchasing a house, a larger down payment also decreases the risk that a lender takes on. Regular payments towards utilities, telecommunications, insurance, etc, and/or confirmation letter from service provider(s).
• Income – Lenders want to verify that you have a dependable source of income, to ensure that you can make payments.
• Credit score – The higher your credit score, the lower your interest rates.
• Property – Because other factors are risky (i.e. your credit score), lenders need to secure their investment in case you are unable to keep up with mortgage payments.
For example, in getting a second mortgage you could save $1,000/month based on this chart:
| Current Mortgage | Second Mortgage |
|---|---|
| Home Worth $400,000 | Home Worth $400,000 |
| Current Interest Rate 3% | Current Interest Rate 3% |
| Mortgage Payment $1,050 | Mortgage Payment $1,050 |
| Mortgage Balance $250,000 | Mortgage Balance $250,000 |
| Mortgage Requested $50,000 | 2nd Mortgage Payment $250 |
| $25,000 Tax Arrears $500/month | $25,000 Tax Arrears PAID |
| $25,000 Credit Cards $750/month | $25,000 Credit Cards PAID |
| TOTAL: $2,300/month | TOTAL: $1,300/month |
