Toronto: Are debts overburdening your monthly budget? Are you planning to buy a second property? Do you want to consolidate your debts or need another stream of income? For all this, a second mortgage is the best solution of you are in Canada. Read to know how!
What is Second Mortgage in Canada?
A second mortgage is a loan you take out against your house. You can borrow up to 80% of the appraised value of your house, minus the debt on your first mortgage.
Second Mortgages are Collateral loans. A collateral loan is a type of secured loan requiring a borrower to pledge an asset to avail of the loan. The asset, called a ‘collateral,’ is liquidated by the lender in case the borrower defaults. Your home equity is used as collateral for the loan. You must keep paying off your first mortgage as you pay off your second mortgage.
You risk losing your house if you are unable to make your loan payments and your loan goes into default. If so, both your first and second mortgages will be paid off by selling your home. You would pay your primary mortgage lender first.
Interest Rates and Fees on Second Mortgages in Canada
Second mortgage interest rates are often higher than first mortgage interest rates because second mortgages include a greater risk to lenders. However, there are few Banks/lenders offering second mortgage at the same rate as first mortgage. In order to do so your mortgage should be placed with the right lender.
You might be required to pay administrative costs like:
- Appraisal fees
- Title insurance
- Legal fees etc.
Why would you need a Second Mortgage?
Various factors may call for a second mortgage. These are the typical reasons for getting a second mortgage:
Your high-interest debt, such as credit cards and student loans, can be paid off with a second mortgage so you can concentrate on repaying one loan with a possibly lower interest rate.
Borrow for some major Purchase:
Let’s say you need money to pay for a renovation or your child’s education. You can leverage the equity you’ve accrued in your house to finance expensive purchases for which you might not otherwise have the funds.
Buy a Second Property:
This could be a cottage, a second home, or a piece of real estate for investment. You can get a second mortgage to help you pay for anything.
How to take Second Mortgage in Canada?
When thinking about a second mortgage, it’s crucial to be aware of all your potential financing alternatives. Want to know more? Let’s start now.
Home Equity Line of Credit (HELOC):
The equity you’ve accrued in your current house determines how much you can borrow with a HELOC. This can allow you to borrow up to 80% of the value of your house.
Say your house is valued at $500,000; 80% of that sum is $400,000. Suppose your mortgage has $300,000 left to pay; You might be able to borrow up to $100,000.
When interest rates are low, refinancing your current mortgage might be a better option than getting a second loan if the lender you’re with doesn’t offer second mortgage. You could also refinance with lesser cost, if your first mortgage is a Variable mortgage. For someone having a fixed mortgage placed at first place, refinancing will attract huge penalty (Approximately 4-4.5% of balance outstanding). Few lenders offer blend & extend products which basically add back the penalty to the mortgage balance and offer you a rate average of first mortgage and current market rate.
By refinancing, you essentially renegotiate your current mortgage contract and take advantage of the equity you’ve built in your home. To discuss the advantages and disadvantages of refinancing your mortgage, get in touch with a mortgage specialist.
Mortgage for another Home:
Second mortgage can be used to take out equity from the existing home if you’ve been thinking about purchasing a second home, such as a cottage, a home closer to your office, home for your kids or parents etc. Down payment for another home could also be sourced by way of second mortgage if you plan to keep the existing home as rental and move to a new primary residence or vice versa.
Benefits of Second Mortgage in Canada
With a second mortgage, you can avail the following benefits:
Boost your Home Renovation Tasks:
You can finance home improvements or renovations with this financing. Renovations and retrofits are great strategies to raise the value of real estate. When a property is sold, it makes more money since it has been better cared for. You can easily invest in real estate with your second mortgage.
Raise Investment Fund for your Business:
Did your bank reject your business loan request? If so, are you looking for other business loan options? In that case, using a mortgage to access equity may be helpful. It might be a terrific strategy for you to get money from the other properties you own in real estate. Use these funds to expand your current business or launch a new one.
Create Additional Revenue Stream:
You can generate more income for yourself and your family by drawing on your equity. A mortgage can be used to support other investments, acquire land, buy a vacation house, invest in stocks, buy an investment property, or make an investment using your equity. Borrowers who want to diversify their financial holdings may find this to be a fantastic opportunity.
Improve your Credit Score:
If high debts and past due bills have negatively impacted your credit score, a second mortgage can be helpful. Obviously, your credit score should not be so bad that you disqualify for the second mortgage. But, if you qualify and keep on paying the installments timely, it will improve your credit score.
So now you have most of the information about second mortgage in Canada. If you want more technical information, then always book a consultation with a professional real estate and investment specialist. But, for more interesting information, keep visiting this blog space and help us build a strong community.
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