Do you have a large expense that you need 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 (the latter of which is definitely not recommended), you have other options. More specifically, you may want to consider a second mortgage.
Read this before you apply for a second mortgage.
What is a Second Mortgage?
Basically, a second mortgage is another loan that you take out on your home. You’ve already got a mortgage on your property, and a second mortgage is just that – a second mortgage on your home.
Depending on how much equity you have built up in your home, you may be able to borrow against it in order to use the funds for a major expense.
Also referred to as a home equity line of credit (HELOC), a second mortgage uses your home as collateral for the loan. The loan is considered a “second” mortgage because the mortgage you took out to finance your home purchase is usually the first loan secured by a lien on your property.
Building up equity in your home through appreciation or regular monthly mortgage payments allows you to take advantage of having an asset of value that you can use to your advantage in the form of a second mortgage.
Ever wonder what it costs to buy a house in the rest of Canada? Check out this infographic.
What’s the Difference Between a HELOC and Home Equity Loan?
Both a HELOC and home equity loan fall under the second mortgage umbrella. They are very similar, but their payouts differ. Both options allow you to borrow against the equity in your home.
HELOC. You may be able to borrow money against our home’s equity by taking out a line of credit, which is essentially what a HELOC is. Similar to a credit card, you will be approved for a certain limit which you can borrow against. You can withdraw as much or as little as you like, as long as it’s not any more than your approved limit.
With a HELOC, you are 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, as long as payments are made on time and you don’t go over your credit limit.
Home equity loan. Instead of having a pool of money that you can withdraw from as much or as little as you please (as is the case with a HELOC), a home equity loan provides you with a lump sum of money upfront. The entire loan amount will be charged interest and you will be expected to make fixed installment payments until the full amount is repaid, much like any other type of loan.
Read this for more information about borrowing using your home equity.
How to Qualify for a Second Mortgage in Toronto
In order to be eligible for a second mortgage, you’ll need to meet certain criteria. Just like other types of loans, lenders will take a close look at several factors to make sure you’re not too much of a risk and that you’ll be able to make your payments in a timely fashion.
Credit score. Borrowers will need to have a decent credit score in order to qualify for a second mortgage in Toronto. Generally speaking, a score of 680 or more is typically required, though bad credit second mortgage options may be available.
Equity. Lenders want to make sure there is still enough equity in their homes after they’ve borrowed against it. That way their loan-to-value (LTV) ratios won’t be too high, which would put them at risk should interest rates soar or if a sudden drop in income occurs. As such, borrowers will need to have at least 20% equity in their homes after borrowing against them.
Here’s what to do if mortgage rates increase while you’re buying a house.
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.
Click here to see what happens when you miss a mortgage payment.
Pros and Cons of Getting a Second Mortgage
There are obvious advantages to taking out a second loan, but there are also some potential disadvantages that may come with them.
Money borrowed. The reason why you would apply for a second mortgage in Toronto in the first place is to get access to the money needed to cover an expense. 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 a valuable asset – your home – which is probably worth quite a bit. The amount of money that you would actually be able to borrow depends on your situation and your lender, but you can probably borrow up to 80% of the value of your home.
For the ins and outs of asset-based financing, watch this short video.
Lower interest rate. Second mortgages typically come with lower interest rates compared other types of debt, making the loan more affordable than other types.
Risk of losing your home. Since you are using your home as collateral for the loan, there is always the risk of losing it if you are in a position where you default on the loan payments. If you stop making payments for whatever reason, your lender can repossess your home through foreclosure. That’s why it’s important to assess what you need the money for and whether or not you’re financially comfortable with the extra payments.
Look here for more information about missing mortgage payments and foreclosures.
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.
Do you know what the true cost of borrowing is? Take a look at this infographic.
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).
For a look at safe vs. risky investments, read this.
Find the Right Second Mortgage Product 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.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.