Do you have a large expense to pay for and are considering taking out a loan to cover it? While you could always take out a personal loan or even spend against your credit card, you have other more affordable options, such as a second mortgage.
If you own a home and have accumulated enough equity, you may be able to tap into it to access a large sum of money to cover all sorts of big expenses.
Key Points About A Second Mortgage In Toronto
| What is it? | A second mortgage in Toronto lets you use the equity in your home to access a large sum of money to fund any expense. |
| Who’s eligible? | You need at least 20% equity in your home to qualify for a second mortgage. |
| Types of loans that fall under a second mortgage | Home equity lines of credit (HELOCs) and home equity loans fall under the umbrella of second mortgages. |
What Is A Second Mortgage In Toronto?
A second mortgage is another loan that you take out on your home in addition to your original mortgage. Depending on how much equity you have built up in your home, you may be able to borrow against it and use the funds for a major expense.
Also referred to as a home equity line of credit (HELOC) or home equity loan, a second mortgage uses your home as collateral for the loan.
| Why Is It Called A “Second Mortgage”? The loan is considered a “second” mortgage because it comes second in line to your first mortgage (the loan you took out to finance your home purchase). Distinguishing between the two is important, particularly in the event of mortgage default. If this happens, the lender holding the first mortgage will be paid off first using the proceeds of the sale of the property. Any remaining money will go towards repaying the lender holding the second mortgage. |
Second Mortgage In Toronto: HELOC vs.Home Equity Loan?
Both a HELOC and home equity loan fall under the second mortgage umbrella. They are very similar, as both options allow you to borrow against the equity in your home. However, they work very differently.
HELOCs
Similar to a credit card, a HELOC is a type of revolving credit that you can withdraw from, up to a certain limit. You can take out as much or as little as you like, up to your approved limit.
With a HELOC, you’re only charged interest on the money you withdraw and not on the full credit limit, just like a credit card. When you repay what you’ve borrowed, you’re free to continue borrowing over and over again. Moreover, the principal payments aren’t required until the draw period is over, until then you simply need to make the minimum payments.
Home Equity Loans
Home equity loans work more like traditional loan products than HELOCs. A home equity loan provides you with a lump sum of money upfront. You’ll be charged interest on the entire loan amount and will make fixed installment payments until the full amount is repaid, much like any other type of loan.
How To Qualify For A Second Mortgage In Toronto
To be eligible for a second mortgage, you’ll need to meet certain criteria, including the following:
Have Good Credit
You will need to have a decent credit score in order to qualify for a second mortgage in Toronto. Generally speaking, a score of 660 or more is typically required, though bad credit second mortgage options may be available. You can find out what your credit score is for free by using Loans Canada’s CompareHub tool.
Have Enough Equity
Lenders want to make sure there is still enough equity in your home after you’ve borrowed against it. That way, your loan-to-value (LTV) ratio won’t be too high, which would put you at risk should interest rates soar or if a sudden drop in income occurs. As such, you’ll need to have at least 20% equity in your home to borrow against it.
Earn An Adequate Income
Of course, you’ll need to be able to afford the payments in addition to your loan payments on your first mortgage. As such, lenders will take a look at your income to make sure you’ll be in a sound financial position to make your payments as required.
Pros And Cons Of Getting A Second Mortgage In Toronto
There are obvious advantages to taking out a second loan, but there are also some potential disadvantages that may come with them.
Pros Of A Second Mortgage
- Higher Loan Amounts Available. Second mortgages allow you to borrow much higher amounts than you probably would with a personal loan. That’s because the loan is secured by your home. You can borrow up to a maximum of 80% of the value of your home minus your remaining mortgage balance.
- Lower Interest Rates. Second mortgages typically come with lower interest rates compared to other types of credit such as personal loans or credit cards, making it a more affordable option.
- Easier To Qualify For. Compared to unsecured loans, second mortgages may be easier to get approved for because of the collateral used to secure the loan.
Cons Of A Second Mortgage
- Additional Costs. Like your first mortgage, a second mortgage comes with some additional costs that you’ll be responsible for covering. There are costs associated with an appraisal, credit check, origination fees, and so forth, which can add up to hundreds or even thousands of dollars.
- Additional Loan Payment. When you take out a second mortgage in Toronto, you’re adding more debt and another loan payment.
- Risk Of Losing Your Home. Since you’re using your home as collateral for the loan, there is always the risk of losing it if you default on the loan payments. If this happens, your lender can repossess your home through foreclosure or power of sale. That’s why it’s important to assess what you need the money for and whether you’re financially comfortable with the extra payments.
What Can You Do With A Second Mortgage?
There are plenty of reasons why you might want to take out a second mortgage in Toronto, including the following:
- Consolidate debt
- Renovate your home
- Avoid paying mortgage insurance (or CMHC insurance)
- Buy a car
- Cover wedding expenses
- Pay for children’s university or college tuition
- Pay for unexpected medical expenses
- Buy an investment property
- Invest in your business
- Pay off a consumer proposal
- Pay down your mortgage and tax arrears
Whatever you choose to take out a second mortgage for, be sure to use these funds wisely. Don’t take out a second mortgage just to have access to more spending money. Instead, put that money towards something worthy and that may even help you build some wealth for the future (such as investment opportunities).
Will A Second Mortgage Hurt My Credit?
Taking out additional loans and credit products will pull your credit score down, though only for a short period. That’s because lenders will perform a credit check — or a “hard inquiry” — which will appear on your credit report. A hard inquiry happens when a lender reviews your credit report after you apply for a loan.
That said, any negative impact from lenders pulling your credit report is only temporary. What really makes an impact on your credit score is how you manage your loan.
If you make on-time payments every billing cycle, your credit score can improve. On the other hand, missing payments may do the opposite. So, before you apply for a second mortgage in Toronto, make sure you’re financially capable of handling an additional loan payment first.
Find The Right Second Mortgage In Toronto For You
If you have a valid reason to take out a second mortgage in Toronto and you have enough equity in your home to make that happen, your next step is to find the right product with the right lender. Let Loans Canada connect you with a second mortgage lender who can offer you terms without placing you in a financially risky situation.
Second Mortgages In Toronto FAQs
Can I get a second mortgage to buy another home?
Can I get a second mortgage if I have bad credit?
Can I refinance a second mortgage?
Are there closing costs associated with second mortgages?
Do I need a home appraisal to get a second mortgage in Toronto?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
