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Should I Take Out a Second Mortgage?

Taking Out a Second Mortgage

When money gets tight, you need to know what your options are.  

Maybe you considered getting a second job, selling your car or requesting a raise. If you tried these strategies and you are still feeling financial stress, you might need financial assistance. Perhaps you have a large renovation in mind, and you don’t have access to any spare funds. You might need a second mortgage.

What is a Second Mortgage?

A second mortgage is an additional mortgage you get on a property that already has a mortgage. A second mortgage can look like a regular mortgage where you borrow all the funds at once. It can also come in the form of a home equity line of credit (HELOC) where you borrow funds as you need each month up to an amount approved by your lender.   

You can use a second mortgage for debt consolidation, mortgage refinancing, renovations, investments or to pay for unexpected expenses like medical bills.

It is important to remember that you must still make monthly payments on your first mortgage when managing a second mortgage.

How Do I Qualify For A Second Mortgage?

To qualify for a second mortgage, you need more than 20 percent equity in your home for urban areas, or more 35 percent in rural areas. Equity is the portion of your property that you own and have paid for.

 Qualifying For Second Mortgage From a Bank or Major Financial Institution

If you decide to borrow from a bank or other major financial institution like a Credit Union or the Home Equity Bank, there are several requirements you need to meet in order to get your second mortgage approved.

Depending on the financial institution, you may need more than 20 percent equity in your home and a minimum credit score they set. You may also be required to provide information about your profession, education or annual income before the bank decides to approve your second mortgage.

Qualifying For Second Mortgage With Private Lenders

To qualify for a second mortgage from a private lender, the only requirement is that you have at least 20 percent equity in your home. Private lenders do not look at your education, occupation, income or credit score.  

Second Mortgage Interest Rates

Second mortgages are considered riskier than first mortgages, and thus have higher interest rates. This is because in the event of payment default and the property is sold to repay the mortgages, the first mortgage lender gets paid first, then any remaining funds are used to pay back the second mortgage lender.

The rate of interest for a second mortgage will depend on the type of lender you use, how much you will borrow, whether you have a standard second mortgage or a HELOC, and how much equity you will use to secure the second mortgage.

The location of your home is also a key factor that lenders use in determining the rate of interest they will charge for a second mortgage.

Both bank and private mortgage lenders will often offer lower interest rates to borrowers in urban areas compared to borrowers in rural communities. The reason urban areas have lower interest rates is that given they are more densely populated; they tend to have more and faster resales which makes properties grow in value faster and are seen by lenders as less risky investments. Borrowers in urban communities can borrow more against their homes before incurring higher interest rates.

To keep interest rates from getting too high when negotiating a second mortgage, and if you live in an urban area, try not to borrow more than 65 percent of the value of your equity in your property.

If you live in a rural community, you should aim to borrow under 50 percent of your home equity to keep interest rates as low as you can.

2. Your Credit Score

Banks will require a credit score of at least 550 to get approved for a second mortgage. The higher the credit score you have, the more likely you can get a lower interest rate.  

A credit score is not required when working with a private lender, since they approve loans based solely on your home equity.

Getting a Second Mortgage in Ontario

Banks offer second mortgages, and they usually require a certain income, credit score, credit history and possibly other information. Banks will typically offer second mortgages in the form of a Home Equity Line of Credit (HELOC). A HELOC can allow you to borrow up to 65% of the purchase price or $260,000, whichever is less. A bank can lend up to 95 percent of the value of your home equity, but only on insured mortgages.

Second mortgages from private lenders are particularly beneficial for borrowers who might not have sufficient income, credit score, occupation, or credit history to get approved from a bank. Borrowers in urgent need of cash will probably not meet all the requirements banks need for approval. Private lenders can lend up to 75 percent of the value of your home equity.

Like any major decision you make, doing your research such as getting referrals and comparing deals is key to making an informed choice.

Sometimes it is challenging to get comparable information about private lenders since they rarely advertise. However, the Mortgage Broker Store has a vast network of private lenders from across Ontario. You can get access to this network with just a quick email or phone call and get quality advice on managing your finances at no charge. Over the past few years, millions of Canadians have opted for a second mortgage to pay debt and prevent bankruptcy. With nearly 3 million jobs lost between February and June due to COVID-19, getting a second mortgage is becoming more common across the country as the virus takes its economic toll.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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