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A second mortgage means taking out a second loan on a home or property that already has a mortgage.
It’s also referred to as a home equity loan. As you diligently make monthly mortgage payments, you build equity in your home.
A second mortgage allows homeowners to take out a loan and borrow against that equity, using your home as collateral.
It’s important to note that when you take out a second mortgage, you’ll be making payments on two mortgages: the primary mortgage, and the second mortgage.
If you stop making payments and default on both your first and second mortgages, you could lose possession of your home to the lender.
There are a few reasons why homeowners may choose to get a second mortgage and borrow against their home equity. Second mortgage rates are higher than rates for primary mortgages, because lenders assume more risk with second mortgages. However, second mortgage rates are lower than other unsecured products such as credit cards or lines of credit. For this reason, second mortgages can be used to consolidate debt, pay off other loans, fund a down payment on another property, or just about anything else that requires a significant chunk of money.
There are other options for taking out a loan using the equity in your home, such as a home equity line of credit (HELOC) and refinancing (more on these options below). However, these options generally require a higher credit score. Second mortgages, on the other hand, are an option if you have a low credit score or a spotty credit history. However, you will be required to go to a private lender, also called a “B lender,” where you will pay higher interest rates.
Applying for a second mortgage is similar to the process of applying for a first mortgage. You’ll need to submit an application that verifies your identity with two pieces of government ID, plus documents that prove your income and employment, credit score and how much equity you have in your home. You’ll also need to provide details about the property itself, so the lender can verify its value. Whether you work directly with a lender or go through a broker, they’ll tell you exactly what documentation you need to provide.
When you apply for a second mortgage, lenders want to be extra sure that you can afford to make payments on two mortgages. When considering your application for a second mortgage, lenders will look at the following:
The amount you can borrow depends on how much equity you have in your home, and how much money you owe on your mortgage. In Canada, the maximum amount you can borrow for a second mortgage is up to 80% of your home’s appraised value, minus your mortgage balance.
For example, if your home is valued at $500,000, 80% of that amount is $400,000. If you have $250,000 left on your mortgage, you may be eligible to borrow up to $150,000.
When you take out a second mortgage in the form of a home equity loan, you’ll receive the funds as a one-time lump sum deposit. Just like your primary mortgage, you’ll be required to make repayments on a schedule set out in your second mortgage contract.
All major lenders in Canada offer options to borrow money using your home equity, whether it’s through a home equity loan, refinancing or a HELOC. Second mortgages can also be obtained through private lenders. Every lender will have its own terms and conditions around what you need to qualify, how much you can borrow and interest rates. Many lenders list their posted second mortgage interest rates on their websites.