Second Mortgage FAQs

Posted on 4th June 2018

Below are some of the top Frequently Asked Questions about second mortgages.

What is a second mortgage?

second mortgage, also called a home equity loan, is an additional loan (you can also get a third mortgage etc.) taken out on a property you already have a mortgage on. Just like the first mortgage, a second mortgage is secured against your property.

Is a home equity line of credit the same as a second mortgage?

A home equity line of credit and home equity loan (or second mortgage) sound alike but they are very different financial products. A second mortgage operates like a mortgage. After being approved for a second loan, the lender will send you a one-time lump sum payment that, like the first mortgage, gets paid off over a predetermined time period with monthly payments. Just like the first mortgage, with a second mortgage, you are charged interest on the total amount as soon as you receive it.

home equity line of credit (or HELOC) is also secured against the equity you’ve built up in your property, but it is more like a revolving line of credit. The money is deposited into an account and you can take out as little or as much as you like. You are only charged interest on the amount you borrow. You also cannot borrow as much with a HELOC and the qualifying requirements can be quite strict.

What is the credit limit with a second mortgage?

You have to have a certain amount of equity built up in your property to get a second mortgage. Exactly how much depends on who the lender is. With the major banks, you need to have at least 25% equity built up in your home; trust companies like to see equity of 10% to 15%; and for private lenders, you can have less than 10% equity. You can borrow up to 80% of the appraised value of your home, minus the balance on the first mortgage.

What is the interest rate for a second mortgage?

The interest rate on a second mortgage can be either fixed or variable. Whether it fluctuates or is fixed, one thing is certain, the interest on a second mortgage will be higher than on the first mortgage. But, the interest rate will be a lot lower than other types of loans, including credit cards, car lease payments, and unsecured lines of credit.

What can I use a second mortgage for?

You can essentially use your second mortgage for anything you like. The sky’s the limit. This includes buying land as an investment or to build on. You can also use your second mortgage to pay for unexpected expenses, a wedding, school tuition, the stock market, purchase a second home…anything! In fact, a second mortgage is a great way for homeowners to consolidate their debt.

Can I get a second mortgage with bad credit?

You’d think that if you had a mortgage and were making your payments on time it would be easy to get a second mortgage. Unfortunately, it’s not. There is a lot more risk associated with a second mortgage than with the first. If you default on your payments and the property is foreclosed, the lender who holds the primary mortgage is paid out first. The lender who helped you secure a second mortgage runs the risk of not getting paid out in full. To compensate, the lender charges higher interest rates than what you pay on the principle mortgage.

Because of this added risk, lenders don’t like handing out second mortgages to those with bad credit. Canada’s major banks want to see a credit score in the 650-900 range and trust companies want to see a credit score 550-700. Private lenders though, because they do not need to follow the same federal rules as traditional lenders, will give you a second mortgage even if your credit score is less than 600.

Is it difficult to get a second mortgage?

Lenders look at a number of different factors when determining whether or not you deserve a second mortgage.

Equity: The more equity you have built up the better your chances of getting a second mortgage. Again, that only applies if you use a big bank or trust company. Private lenders are not bound by the same strict lending rules.

Income: Big banks and trust companies want to make sure you have enough income to make the payments on your second mortgage. Makes sense. Unless you’re self-employed or an entrepreneur and have unreliable income, or, for tax purposes, draw a small income. The bank only cares about the bottom line and simply decides there’s a greater chance you’ll default on the second mortgage.

Credit Score: The higher the credit score, the lower the interest rates.

Property: Because a second mortgage is secured to the property, lenders want to see what kind of property they are investing in. A bank might not give you a second mortgage if they don’t like the property.

What are the risks associated with a second mortgage?

The biggest risk associated with applying for a second mortgage is the possibility of foreclosure. If you run into trouble paying back the first or second mortgage, your home is at risk of being foreclosed. A private, licensed mortgage broker can help you analyze the risks of taking out a second mortgage., Helping You Secure a Second Mortgage

Stricter lending rules mean big banks and trust companies want to make sure you have a lot of equity built up in the property, high income, high credit score, and as much documentation as possible. simplifies the process, making it easier for you to get a second mortgage.

How can we provide better service than the big banks, trust companies, and other private lenders? The independent, licensed mortgage experts at work with hundreds of different private lenders. Many of whom specialize in helping those who are self-employed, have unreliable income, or have poor credit secure a second mortgage.

If you are interested in finding out what kind of second mortgage you qualify for, contact today or apply online and a mortgage specialist will set up an appointment at your earliest convenience.

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