A second mortgage sounds like taking a loan for buying a second house. But, it is actually an additional loan taken out against an already mortgaged property. The mortgage is often referred to as a home equity loan since it is common to use a home’s equity for securing the second mortgage.
A second mortgage secures a lump sum of money that you can invest elsewhere or pay off debts. But, it is riskier than the first mortgage – for both the lender and borrower.
- The Reasons for Applying for a Second Mortgage
- The Eligibility Criteria for a Second Mortgage
- Who Are the Second Mortgage Lending Institutions In Canada?
- The Rates for a Second Mortgage
- City vs Country Rates
- Other Fees for a Second Mortgage
- Conclusion on Second Mortgages
The Reasons for Applying for a Second Mortgage
Poor finance management can prove disastrous for a second mortgage borrower. Instead of clearing the debts or improving the financial condition, you could end up with more installments to keep up. Also, the interest rate for a second loan is always higher than the principal one.
The lender is also at risk since their name is in the second position in the property’s title. They may not get the full payment (the first lender will get that privilege) has the borrower been bankrupted.
Despite all the insecurities and calculations, people turn to a second mortgage for these most common reasons:
- Refinancing the first mortgage
- Handling unexpected expenses
- Consolidating debts
- Investing in a lucrative venture
- Fixing or renovating the home
The Eligibility Criteria for a Second Mortgage
The success rate largely depends on a good credit score or more than 20% equity in your home. Without any of them, you have to look for a private lender or trust company and they charge a higher interest rate than a traditional lender.
A lending company considers these four factors before approving the second loan to a candidate:
Credit Score. A good score ensures the lenders that a borrower is a responsible person who carefully deals with all the financial activities and keeps up with due payments. A high credit score guarantees quick approval with a low interest rate.
Equity. Higher equity increases the chance of scoring a second loan. Paying a large sum of money towards the down payment (when you are buying a second house) also helps because it reduces the lender’s risk. Other factors that contribute to convincing the mortgage lender is clearing the bills of insurance installments, utilities, and other charges on time.
Income. Scoring the second loan becomes easier when you have a stable job or a steady income source. It assures the lending institution that you are financially capable of repaying the money.
Property Ownership. It plays a big role since the credit score can fluctuate, equity percentage may drop, and you can lose the job. In that case, property ownership guarantees the lender that their investment is secure.
Who Are the Second Mortgage Lending Institutions In Canada?
Dealing with second mortgage loans is risky. In case of a default, the first mortgage lender will get the priority and will be compensated before anyone else in the line. Regulated banks and traditional lending institutions are unlikely to get involved in that risky business.
Well, there are many private lenders in Canada that offer second mortgage loans. However, each such lending institution has its own unique terms and conditions. Also, their rates vary depending on the region you live in.
The Rates for a Second Mortgage
You already know that the rates are higher than first mortgages from a prime lender. Nevertheless, the charges are still lower than credit card interests and unsecured lines of credit.
The rates vary across institutions and regions. Expect to get similar or slightly different rates from the private mortgage companies operating in the major cities. It fluctuates in suburbs and rural areas.
City vs Country Rates
The private companies that provide the loan facilities for a second mortgage don’t have a widespread national presence like the major banks in Canada. For this reason, each institution operates by its own rules and provides different interest rates. You will get the idea by looking at the rate differences between cities and rural areas.
You are likely to get a better rate if your property is in a major city because most lenders operate in larger cities. The lender does not want the house or property to be in a remote place because it will be a hassle to recoup the money if the borrower defaults on the loan. For this reason, the mortgage interest rates for a property in a country area tend to be higher.
Other Fees for a Second Mortgage
The borrower has to pay some additional fees for a second mortgage. Most lenders don’t work without an upfront fee, which is usually 3% or 4% of the value of a closed-term or open-term mortgage, respectively.
The lenders won’t grant more than 70% or 80% of the loan-to-value (LTV) ratio. If the value of your purchased property is $300,000 and your first mortgage loan is $150,000, the lender won’t grant more than $90,000 for the second mortgage ($150,000 + $90,000 = $240,000, or 80% LTV).
The repayment duration is also shorter in this case. The standard term is one year but it could be slightly more or less depending on the eligibility and financial status of the borrower.
Apart from the upfront, some other fees that may or may not be applicable for a second mortgage are:
- Appraisal fees
- Legal fees
- Notary fees
- Insurance fees
Conclusion on Second Mortgages
A second mortgage is tempting since it gives access to a large amount of money. But, you should be aware of the higher interest rates and the default penalties. Have a sound plan about how you are going to use that money and recoup the installments.