Getting a Second Mortgage in Canada: Everything You Need To Know
In this post, we’ll help you understand everything you need to about taking out a second mortgage in Canada. From what you need to qualify, to how much you can borrow, we’ve covered the main questions our customers have when taking out a second mortgage. By the end, you’ll have a better understanding of what a second mortgage is, how it works, how to get one, and what your options are.
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- A second mortgage is when you take out a second loan on an already mortgaged property, based on the level of equity
- A second mortgage comes in the form of a home equity loan, which is a lump sum amount, or a Home Equity Line of Credit (HELOC), which is a revolving line of credit, much like a credit card
- A second mortgage frees up some of the equity in your home and makes it available to you as cash. Many Canadians use second mortgages to help with debt consolidation, home improvements, or as a second loan for a downpayment
What is a second mortgage?
Simply put, a second mortgage is when you take out a second loan on an already mortgaged property. Generally, a second mortgage will be in the form of a home equity line of credit (HELOC), or another mortgage (a home equity loan). Borrowing amounts are usually lower than your first mortgage, and interest rates are often higher. People often take out a second mortgage to consolidate their debts, pay for major purchases like home improvements, or for investment purposes (like a downpayment on a second property).
Types of second mortgages: HELOC vs. home equity loan
If you already have a mortgage, good credit, and more than 20% equity in your home, you may be able to get a second mortgage in the form of a HELOC. This is a revolving line of credit that lets you borrow money when you need it, up to a specified limit. You’re most likely to find major banks offering HELOCs to people who can get approved, and interest rates will be anywhere upwards of around 2.5 – 3%. With a HELOC, you can access and repay the money whenever, similar to a credit card.
A home equity loan, on the other hand, is a lump-sum payment which you will pay back in monthly installments, just like your first mortgage. A home equity loan is more accessible for people with lower credit scores, and/or less equity in their property. Generally, home trusts and private lenders offer these types of loans, at higher interest rates than a HELOC (from around 10 to 15%). Both HELOCs and home equity loans are loans secured against the equity in your property. As a result, second mortgages are often used to free up the equity in a property for cash flow purposes.
Why would I need a second mortgage?
According to a recent report from Mortgage Professionals Canada, some of the most popular reasons to take out a second mortgage include:
- Debt consolidation. A second mortgage can be used to pay off other debts, by consolidating those debts into a single payment. It’s particularly useful for paying off higher-interest debts like student loans or credit cards, since by grouping your debts you may be able to pay them off at a lower interest rate.
- Home improvements and other major purchases Second mortgages are a good way to borrow money for home improvements, which could ultimately increase the value of your home. Second mortgages are also sometimes used to fund other major purchases using the equity in your home, like college or business expenses.
- Buying a second home. Many people use a second mortgage as a downpayment for a second property. If you’re thinking of buying a second property, a downpayment of at least 20% is required for a second mortgage, unless you or your family members will be living in the new property and not paying rent. The costs of a second home will largely be the same as your first property, including the cost of valuation, administrative, and legal fees.
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How much can I borrow with a second mortgage?
According to the Canadian government, you can borrow up to 80% of the value of your home, after subtracting the balance on your first mortgage. In other words, with a second mortgage, you can borrow up to 80% of the equity in your home. The average credit limit for a HELOC in Canada is about $150,000. Other private lenders may allow you to borrow more than 80% of the equity of your home, but at a higher interest rate than a HELOC.
How do I qualify for a second mortgage?
To qualify for a second mortgage, lenders will assess the following areas:
- Equity. Equity is the amount of the total value of your home that you have already paid for. The greater your equity, the better your chances of qualifying for a second mortgage. For equity of between 5 to 20%, you could qualify for a home equity loan, which has higher interest. For equity above 20%, you could qualify for a HELOC, which has a much lower interest rate, and widely considered a better option than a home equity loan.
- Income. Lenders will look at your income to make sure you can keep up with the repayments on your second mortgage, whether it’s a loan or a HELOC. Lenders will need to be comfortable that you can handle any additional debt, so income is a major factor in the approval process.
- Credit score. A credit score of 650 or higher will help you qualify for a HELOC. Good credit shows your lender that you’re responsible with your money and can make payments on time. The better your credit, the lower your interest rates will be, and the more likely that you’ll be approved for a second mortgage.
Which lenders offer a second mortgage?
Depending on the kind of approach you want to take (HELOC, home equity loan, or refinancing), different lenders provide an array of solutions for people looking to take out a second mortgage. Typically, only major lenders offer HELOCs, whereas home trusts and private lenders are more likely to focus on high-interest home equity loans.
If you’re interested in finding out more about what HELOCs are available to you and at what rates, take a look at our HELOC rates comparison. Alternatively, you can check out our refinancing calculator and see whether refinancing your mortgage might be a better fit for you.
Is a second mortgage worth it? 1st vs 2nd mortgages explained.
Many Canadians choose to take out a second mortgage on their home. If you already have a good amount of equity in your property (above 20%), and you’re looking to free up some extra cash, a HELOC or second home equity loan could be the right option for you. Although a second mortgage requires that you submit the proper documents, and get approved in much the same way as your first mortgage, there are a number of potential benefits.
Besides being a great way to consolidate debt and help you meet your other financial obligations, one of the main benefits of a second mortgage is that you can borrow money without changing the terms of your first mortgage (as you would in refinancing, for example). If you managed to secure a low interest rate in your first mortgage, taking out a second mortgage wouldn’t affect this.
Overall, getting a second mortgage comes with a number of potential pros and cons. On the one hand, second mortgages allow you to free up the equity in your home for things like debt consolidation, investing in another property, or improving your current home – there’s no strict rules on how you choose to spend the money you receive from a HELOC or home equity loan.
On the other hand, second mortgages are a significant financial responsibility on top of your existing payments, and will affect your debt-to-income ratio. They’re likely to have higher interest rates than your first mortgage or refinancing, since lenders don’t have as much interest in your home as your original lender.
Ultimately, taking out a second mortgage is a major financial decision. Make sure you understand what you’re looking for, and look around for the best rates available to you.
Chat with a nesto advisor today and kickstart the conversation to see if getting a second mortgage is right for you.
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