For a second mortgage, lenders will add the balance of both your first and second mortgage to determine your combined loan-to-value(CLTV). Historically, we have seen lenders go as high as 85% on CLTV but, given that average values have decreased across the country, they have recently been reducing that exposure to 80% or even 75%. So, what does this mean for you and what are some reasons to get a second mortgage anyways?
A second mortgage is a type of loan that allows homeowners to borrow against their home’s equity. This loan is separate from the primary mortgage (used to purchase the home) and is secured by the same collateral. As with a primary mortgage, you’re borrowing a lump sum of money from a lender, typically with a fixed interest rate and a set repayment term. This loan is then paid back over time, just like a primary mortgage.
The amount that can be borrowed in a second mortgage depends on the equity in the home (i.e. the difference between the home’s value and the outstanding mortgage balance). When you have a mortgage on your home, the lender comes first (i.e. first charge). If you sell the home the bank gets paid first and you get what’s left. When you get a second mortgage that lender goes in second place and is independent of the first (with a separate payment and rate).
Now, if you sell the home, the first lender gets their money, the second lender gets their money, and you get what’s left. The further you get away from first place, the riskier the deal becomes. For that reason, you can expect to pay a higher rate for a second mortgage. As a precaution, not every first-position lender will allow a second mortgage (so you’ll want to double-check that getting a second mortgage doesn’t automatically put you into default).
There are some key differences between a second mortgage and a home equity line of credit (HELOC):
- A second mortgage is a lump sum loan that is paid back over a fixed term, typically with a fixed interest rate (typically higher as well)
- A second mortgage is not re-advanceable (you can’t re-borrow as you pay it off) but often have higher borrowing limits than HELOCs
- You can borrow up to 80% of the value of the home (in most cases in Ontario)
Some examples of when you might consider a second mortgage:
- Home improvements: If you want to make significant upgrades or renovations to your home but don’t have the cash up front, a second mortgage may be an option. The funds from the second mortgage can be used to pay for the improvements.
- Consolidating high-interest debt: If you have high-interest debt such as credit card balances or personal loans, a second mortgage can be used to consolidate the debt — since the interest rates on a second mortgage are generally lower than other types, this reduces costs.
- Significant expenses: If you have a larger one-time expense, a second mortgage can be used to cover the costs since it may be more cost-effective than using a credit card or loan.
- Flexibility & easier approval: Second mortgages may be easier to qualify for than other types of loans because the home secures them and can also be structured in various ways allowing homeowners to choose the option that best fits their needs.
- No need to pay out your first mortgage: Unlike a full refinance, adding a second mortgage in Ontario does not require homeowners to necessarily give up their existing mortgage terms which can be beneficial for homeowners who have a low-interest rate on their first mortgage and do not want to pay out their first one.
As you can see, a second mortgage can be a useful financial tool for various reasons and depending on an individual’s circumstances or goals. Before proceeding, it’s essential to carefully evaluate your financial situation, assess your ability to repay the loan and consider the associated costs (i.e. interest rates, fees, and potential impacts on credit score and home equity). Make sure to consult with a mortgage professional — like us! — to help you make the best decision based on your needs.
Contact the Kyle Miller Mortgage Agent team today! We’ll review your situation and find a second mortgage option that works.
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