What is a second mortgage, and why would you want to get it? It sounds like a huge financial burden, getting you into even more debt. The good news, however, is that it’s not.
A second mortgage actually uses the equity that is accrued in your home. Thus, your original mortgage isn’t affected, and the second one can actually be of great benefit.
So, what is equity? It is the value of your home that does not have any debts attached to it. Let’s say you buy a home in Toronto, Ontario for $1,000,000 with a down payment of 20%. This would give you $250,000 in home equity.
Your home equity grows as you pay off your mortgage. It can also grow passively, such as when homes in the same geographical area go up in value due. So if home in your area increase in value by 10%, then your home equity likely has as well since your home is now viewed as a more valuable asset than it was before.
If you wanted to, you could borrow against your home equity with a secured loan, or second mortgage. These loans can help you fund renovations, eliminate large amounts of debt, fund investments for your future, and anything else you wish.
The Different Types of Second Mortgage Loans in Ontario
When considering taking out a second mortgage, there are two main options open for you (as listed below). It’s best to consider which one is right for your needs.
- Home Equity Loan: This is a loan that allows you as the owner to borrow against the equity that has built up in your home. This leaves the original mortgage untouched, but the loan is secured against the property. With this loan, the borrower gets a lump sum of cash at the start of the loan term.
- Home Equity Line of Credit (HELOC): This is a combination of a line of credit and a home equity loan, creating the home equity line of credit. The borrower can draw funds whenever they need to, and as many times as they want, up to their approved credit limit.
You will need to consider your options and ensure that you apply for the one that is most suited to your needs and reasoning for taking a second mortgage.
Home Equity Requirements Needed to Get a Second Mortgage
When applying for a second mortgage, it’s the same as you would for any form of credit. There are certain things that the financial institution will check and require before giving you an answer, such as the following:
- Income verification: This is standard practice to prove to the bank that you are able to make the repayments. Just like a traditional loan, you will be required to repay the amount borrowed, even if the payments are lower than typical loans.
- Credit score: Your score will be checked to ensure that you have good credit. There should be no or little history of missed or late payments, as these indicate you could be a risk. A second mortgage can also have an impact on your credit score, so it’s a good idea to check it regularly to ensure that there are no issues.
- Property: The equity built up in the home also needs to be evaluated. Equity is the value of your home that you completely own, meaning there are no debts attached to it. Lenders check how much home equity the borrower has available to help determine who is eligible for a second mortgage. In Canada, you will need at least 5% equity to get a second mortgage from a private lender. For those looking for a second mortgage from a credit union or a bank, they will likely need at least 20% home equity to get approved.
For every payment that you make on your home, your equity increases, and this can contribute to a rise in the overall value of the property itself. Thus, one of the deciding factors will be if enough has accrued in order for it to be of value to you.
Using the calculator tools available, you can estimate the value of the built-up equity. A mortgage broker or lender can confirm the final amount during your application.
Essentially, the equity is worked out by taking the current market value of the property and the balance paid already, and then calculating the difference.
The Benefits of Getting a Second Mortgage
There are many reasons why you may consider getting a second mortgage. And it’s good to understand how this can be of benefit to you.
Let’s start with the interest rate, as this is one of the first things we think about when considering any financial matters. A second mortgage usually has a lower interest rate compared to credit cards or other forms of loans.
Seeing as this is taken out against the equity you have already built up, rates are lower and the subsequent monthly repayments are usually at a more manageable amount as well.
Being that the loan is from the equity, you have access to larger amounts of money than you may get when applying for a traditional loan.
You can also have access to it faster. While there is a cap that is imposed, thus preventing you from taking all the money out, this helps you to keep building the equity so that there is always something there for you.
Another advantage is that if you need money on a monthly basis, but are unsure as to the amount, then your broker can help you to take what you need when you need it. This is where a HELOC is beneficial to you.
With structured payments and withdrawals, you can manage how much you are drawing from the equity, allowing you to take what you need.
On a personal level, a second mortgage can help you to rebuild your credit score by using the money to clear off debts quickly. You can even use the money to invest in your future, either through an investment broker or by starting up your own company.
The Financial Relief From Your Dream Home
Second mortgages can be the relief you need to consolidate debts, invest in your future, or make those much-needed renovations. This is money that you have invested in your home for years, and it’s time to make it work for you.
While it is important to make sure that your credit, equity, and income are all verified and that you are able to repay the mortgage, the impact that this secured loan will provide is noticed and felt almost immediately.
Our expert team at Butler Mortgage is trained and skilled in determining the best option for a second mortgage based on your situation and circumstances, creating the best plan for your needs. We will help you navigate the intricacies, and get you on the right track with the right mortgage option.
Author:
Jessica Coates is a blogger in Toronto. She graduated with honors from the University of British Columbia with a dual degree in Business Administration and Creative Writing. Jessica Coates is a community manager for small businesses across Canada. When not working, she leisurely studies economics, history, law and business solutions.