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Second Mortgage

A second mortgage is a type of secured loan that uses your home as collateral. It is versatile and can be in the form of a home equity loan, or a home equity line of credit (HELOC). The Mortgage rates for a second mortgage are higher than first mortgages because the risk for the lender is higher.

Common uses for a second mortgage include home renovation and repairs, debt consolidation, or funding other large projects. Qualifying factors that lenders look at include the amount of equity in your home, your credit score, and your income. The greater the equity in your property the greater the sum of money you can borrow.

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    A second mortgage is a secured loan that uses your home as collateral and gives you access to the equity you’ve built up in your home for funds. Since they are secondary to the first mortgage there is a higher risk for the lender. In the worst-case scenario of a foreclosure the first or principal mortgage is paid out first, so the second mortgage is at a higher risk of not being paid out in full. To account for this higher risk the mortgage rate will be higher than a principal mortgage. A second mortgage can be a lump sum or a line of credit:
    • Home Equity Loan: A home equity loan provides you with a lump sum of money that can be used and is paid back in installments with interest.
    • Home Equity Line of Credit (HELOC): A home equity line of credit, or HELOC, is a line of credit that you can use on demand and is paid back over time, similar to how a credit card works.
    You can use a second mortgage for a variety of your projects. Common uses include home renovation and repairs, debt consolidation, or funding your other large projects:
    • Home Renovations and Repairs: Home renovations and repairs can be expensive but a second mortgage allows you to use the equity that you’ve built up in your home to fund the work. Renovations and repairs to your home can increase the value of your home so using a secured loan to do so can be to your advantage.
    • Debt Consolidation: Combining your loans in one place at a lower rate saves on interest payments and makes your existing debt situation more manageable. This is known as debt consolidation. While a second mortgage will have a higher mortgage rate than a principal mortgage they will usually have a much lower interest rate compared to other loans. This is because they are secured against the home whereas credit cards and other loans are unsecured and have higher interest rates.
    • Fund Large Projects: The versatility of a second mortgage allows you to use your equity to fund other projects. This includes paying for an education or certification which can lead to greater earning potential. A second mortgage can even be used for other projects such as buying a vehicle or making investments. In certain situations they can even be used to avoid private mortgage insurance by maintaining a particular balance between the loan-to-value ratio of your existing mortgage.
    A second mortgage is a versatile financial tool and like any tool how you use it is up to you. Be sure to consult trusted and experienced mortgage professionals to find the right solution for you.
    When applying for a second mortgage lenders will look at your equity, your income, credit score, and at your property:
    • Home Equity: Since a second mortgage taps into the equity in your home, lenders will look at how much equity you have built up in your property. The greater the equity you have the larger it can be.
    • Income: Lenders will look at your income when assessing you for a second mortgage. A dependable source of income gives assurance to the lender that you can make payments on your loan.
    • Credit Score: Credit scores are a measure of how reliable you are at managing and paying back your credit. Regular and consistent payments demonstrate a track record and help improve your credit score. The higher your credit score the lower your mortgage rate will be for your second mortgage.
    • Value of Property: Since a second mortgage is secured against your property, lenders will look at the value of the property to secure their investment in the event of a default or foreclosure.

    Tips for Getting a Second Mortgage

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    What are Some of the Advantages of a Second Mortgage?

    Second mortgages have several advantages that can be to your benefit. They allow you to access significant sums of money, have favourable interest rates compared to unsecured loans, and can have some tax benefits.

    • Amount of money: Since a second mortgage is a secured loan you can have access to a larger sum when compared to unsecured loans. The greater the equity in your property the greater the sum of money you can borrow.
    • Lower interest rates: A secured loan is less risky than an unsecured loan which means that a second mortgage will typically have a much lower interest rate than an unsecured loan such as a credit card. This works to your advantage when consolidating debt as you can transfer high interest loans to a lower interest loan, saving you money over time.
    • Potential tax benefits: In certain situations, you may be able to get tax benefits for the interest portion of your mortgage.

    What Should I Be Aware of Before I Get a Second Mortgage?

    It is important to understand that a second mortgage is a loan and as such has some risks and factors to consider. When applying, you need to consider the loan costs, the interest payments, and the risk of foreclosure.

    • Closing and Associated Costs: When applying for a second mortgage there may be additional costs. There may be an appraisal of the property required. Lenders may have processing costs. Be sure to understand all the closing and associated costs when applying for a loan.
    • Interest Rate: When you borrow money for a loan you pay the lender interest. The mortgage rate for a second mortgage will be lower than an unsecured loan but typically will be higher than the interest rate of your primary mortgage.
    • Affordability: In the worst-case scenario where you are unable to continue making payments the lender will be able to take your home through foreclosure. Before you take a second mortgage it is necessary to consider your ability to make payments over the course of the loan.

    Is it harder to get a mortgage if I am self employed?

    Obtaining a Self-Employed Mortgage can be more difficult than a traditional mortgage as the borrower has to take extra steps to prove to the lender that they are capable of maintaining regular payments on their mortgage. It is possible that depending on the financial institution, that Self-Employed Mortgages are not offered at all. Where they are offered, there is also the chance that banks will significantly increase the interest rates for these loans, making them a more difficult consideration for borrowers. To give a better chance at being approved, lenders are expected to offer a large down payment, up to 20% or higher, as well.

    Another difficulty associated with Self-Employed Mortgages is the lack of a T4. A full time Employee can provide proof of income through a simple T4, however a self-employed individual must provide a stated income form, which shows the amount the potential borrower claimed to have earned, and then must provide documentation which can prove the stated amount is accurate.

    Lenders will also apply the Debt Service Ratio when considering your eligibility for a loan. This is a measurement which determines your ability to maintain regular payments on a loan after all your financial responsibilities have been considered. These include monthly bills, car loans, lines of credit, student debt and any other loans.

    If after considering these other factors the bank is confident that you are able to meet their requirements for regular payments, you will be eligible for a loan.

    Commonly Asked Questions

    A second mortgage is a secured loan and lets you borrow against the value of your home, giving you access to significant sums of money. They have favourable interest rates compared to unsecured loans. Common uses include home renovation and debt consolidation. Lenders will look at your equity, your income, credit score, and your property.
    A second mortgage is a versatile and useful tool that can be beneficial, and may even save you money. They make good sense if you have equity and large expenses planned. Talking to an expert can help you better understand your context and situation.
    The amount you can borrow on a second mortgage will be determined by the existing equity in your property as well as additional factors such as income and credit score. The greater the equity in your property and the higher your credit score the more money you can borrow.
    When you take on an additional loan like a second mortgage that is reflected in your score. In the short term this could be a negative impact on your credit score, but if used to consolidate debt at a more manageable rate it can be beneficial over the long term.
    Since a second mortgage is a secured loan it will have a lower interest rate than unsecured loans like credit cards. This works to your advantage when consolidating debt as you can transfer high interest loans to a lower interest loan, saving you money in the long term.
    A second mortgage can be a lump sum or a line of credit. A home equity loan provides a lump sum of money and is paid back in installments. With a home equity line of credit, or HELOC, you can borrow as needed and pay back over time.

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