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A First Look at Second Mortgages

Feb. 15, 2012
3 mins
A senior couple review their finances with a laptop and paperwork

At first glance, getting a second mortgage may seem like adding insult to injury. If you already find it hard enough to meet your monthly (or bi-weekly) payments on your first mortgage, why would you want a second one?!? The fact is that a second mortgage is really a secured line of credit (secured against the value of your house), so financial institutions will offer you a much lower interest rate than, say, credit card companies. As a result, a second mortgage can either save you money in the long run (if you’re looking to consolidate various high-interest debts) or enable you to undertake home renovations you otherwise wouldn’t be able to consider for the long term.

How do I Qualify

You can get a second mortgage for up to 80 percent of the value of your home. But you can only qualify for the amount that you already “own” in equity. In other words, if your home is worth $500,000 today, you could qualify for up to $400,000 in a second mortgage. But if your first mortgage still has a balance for $250,000, the bank will only give you a $ 150,000-second mortgage ($400,000 minus $250,000). To find out what your house is currently worth, you’ll need an independent appraisal of the value of your home. A professional appraiser will visit the house to take notes of the size of the property, the number of rooms, the building’s age, and the condition it’s in, among other details, then compare it to similar homes that have recently sold in the immediate area. You’ll also need to go through a similar process to when you applied for your first mortgage, providing the lender with the appropriate mortgage documents, identification, employment and tax records, bank statements, and a tally of your monthly expenses.

How it Works

Once you’ve been approved, the bank will set you up with an account you can access like any other – in person at a branch, at an ATM, online, or using cheques connected to the account. You are free to use the funds for whatever you want (renovations, a vacation, a car loan, your kid's education). Then, every month you either have to make a minimum payment or the bank with automatically withdraw the minimum from an account you have linked to the line of credit.

Fees and Other Costs

As with your primary mortgage, there are fees, or “closing costs” associated with a second mortgage. The appraisal costs a few hundred dollars, though some lending institutions will cover the cost of the appraisal provided you start using the associated secured line of credit and maintain a minimum balance on it if for a set period of time. You’ll also need your real estate lawyer to review and update your mortgage documents, though this is less detailed (and therefore less money) than it is for processing the first mortgage. The biggest difference to be aware – and beware – of between a first mortgage and a second mortgage is that there’s no such thing as a fixed-rate line of credit mortgage. The interest rates charged are tied to the bank’s posted rate. As interest rates creep up, so will the cost of your loan. So, like all other forms of debt, it’s important to keep the amount borrowed on your second mortgage at a manageable level.

Allan Britnell

Toronto-based freelancer Allan Britnell is an award-winning writer with nearly 20 years’ experience. He covers a diverse range of topics, including DIY and professional home renovation projects, nature and the environment, small business, personal finance, and family and health issues. He is also the managing editor of Renovation Contractor, the publication written for small- and medium-sized contracting and custom home building companies. He lives in Toronto with his wife, two daughters, and their dog, Oscar.

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