6 Things You Need to Know About Taking Out a Second Mortgage
If you’re a Canadian homeowner, then you’re probably all too familiar with mortgages. However, what do you know about second mortgages? Although over two million people in Canada have taken out a second home mortgage, many are still unclear about how this type of mortgage works.
Building up equity is a great advantage of owning property. If you’re able to use that equity sooner rather than later, then all the better! Second mortgages can be greatly advantageous. Here are 6 things you need to know to build up your assets.
1. What exactly is a second mortgage?
Let’s start with the basics. While a primary mortgage refers to the first loan undertaken by homeowners for property, a second loan acquired for the same property is called a second mortgage.
A second home mortgage is granted before the primary one is fully paid off. The total amount, however, depends on the equity of the house bought through the first mortgage. Here, equity refers to the value of a property minus mortgage debt and loans, and is calculated by subtracting the value of the property from the remaining balance left over from the primary mortgage.
Essentially, the higher your property equity, the higher the chances of getting a second mortgage. A second home mortgage is the loan that a lender will present to you based on the equity you’ve built up over the years. The key advantage to this kind of mortgage is that it will allow you to access up to 95% of the equity you’ve already built up just by owning the property.
2. There are different kinds of second mortgages
Second home mortgages can come in the form of different loans. The options allow homeowners to pick the one that is most suited for their existing loan and equity history. The two kinds of second mortgages are:
1. Home equity loans: This type of second mortgage will allow you to use the loan money only once. After the lump sum is used and spent, there will be no more money available to use.
2. Home equity lines of credit: The second kind of second mortgage functions like a revolving loan. The homeowner is extended a line of credit, which allows for flexibility in drawing out the money when needed, paying it down, and using it over and over in different circumstances.
3. The amount you can borrow varies
The total amount you can borrow for your second home mortgage is directly linked to how much existing equity you’ve built up for your property. For example, if the value of your home is $300,000 and you still have $250,000 remaining to pay off, then the equity for your home will be $50,000. The higher your equity, the more likely you are to qualify for that second mortgage. Lenders will usually have restrictions on the loan-to-value (LTV) ratio to take second mortgages into consideration.
Therefore, if you’ve built up some equity, a second mortgage is a great way to access money fast. However, since the rates and conditions attached depend on the lender you go to, make sure you do your research and find a lender who works best with your financial history. A credit score and income do not typically play an important role when qualifying for a second home mortgage, which is great for those that do not meet typical income or credit qualifications required by traditional institutions.
4. You can use your equity in different ways
A great advantage of buying a home is that you’ve accrued equity over time. Second home mortgages allow you to use that money to your advantage.
The options you have in how you wish to use your equity are limitless. You can use the funds for home improvements, education, and emergency funds. At Canadalend, our team has seen that a popular way to use a mortgage among Canadians is to make an investment, such as buying a rental property. Utilizing your second home mortgage is even more beneficial, as the entire interest on the loan becomes a tax deduction.
5. Second mortgages improve your credit
Borrowing money to pay off any existing debt can be challenging if you have bad credit. Those with low credit scores often think they will not be eligible for certain loans, but when it comes to second home mortgages, this is simply not true!
Taking out a second mortgage and gaining access to your equity is helpful in paying off any outstanding debts immediately, and preventing interest from adding up. Reach out to a mortgage lender who will let you take out your second mortgage, as many traditional banks will not let you take out the loan. You can then use that loan to pay off debt and build up your credit score at the same time.
6. It is easier to qualify with a private lender
Traditional banks and financial institutions often have severe rules in place, thus restricting the kinds of people who are able to apply for loans. Referring to a private lender for your second home mortgage can be beneficial because they often have less stringent conditions and guidelines in place. The regulations and internal policies are more flexible, which is great for homeowners with varying financial backgrounds!
Private lenders will also have guidelines for their loans that determine if the homeowner is a low or high risk. The better you can make your case for why you’d be a good risk for the lender to support, the better pricing you’ll get and the more you’ll be able to borrow.
To conclude, acquiring a second mortgage can be greatly advantageous. Not only does your credit score improve, but you can also get a lower rate, choose to pay off only interests and make your monthly rate lower, and use the money from the mortgage however you choose. Do you want to learn more about second home mortgages and how you can apply them to your life? Our team is happy to answer any questions and concerns you may have.
For more information on second home mortgages, call Canadalend at 1-866-422-6536 or contact us here.