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The idea of buying a second property used to be reserved for those who were well-heeled. Not anymore. Whether it’s used as a vacation property, a rental property, or to prepare for retirement, more and more middle-class Canadians are purchasing a second property. Younger Canadians are also thinking about buying a second property; 65% of Millennials, aged 18 to 34 are interested in purchasing a cottage, cabin, or chalet.

Whether it’s a lakefront cottage, cabin in the woods, condo in downtown Toronto, or a suburban home you’re thinking of investing in or fixing up and flipping, you need to be aware of what you are getting into. That includes the mortgage approval process, refinancing options, and whether you can use a home equity line of credit (HELOC).

Below are some answers to popular questions when purchasing and financing a second property.

Can You Afford a Second Property?

Lots of people want a buy a second property, but you need to ask yourself if you can afford it and if so, how you can get the best financial products at the best rates. While interest rates in Canada are on the rise, they still remain near record lows, which means it’s the perfect time to look at buying a second property.

What Are Your Financing Options?

Refinancing

Buying a second home means, of course, that you already own a first home. Since purchasing your primary residence, you have built up equity in that property. Every time you make a mortgage payment you build up equity. The strong real estate market in the Greater Toronto Area and all of Ontario means your home has also increased in value; this too has helped build up additional equity.

You can tap that equity by refinancing your home. Refinancing is when you replace the original mortgage with a new mortgage. Most people refinance to take advantage of lower interest rates or they find a mortgage with better terms. Some refinance their primary mortgage because they want to switch from a variable mortgage to a fixed rate mortgage.

Again, depending on how much equity you’ve built up, you could use that money for a down payment on the second home, renovations, or maybe even purchase it outright.
Like any mortgage, when refinancing, you can choose a variable or fixed mortgage and renegotiate the amortization period.

A Second Mortgage

Taking out a second mortgage is a popular way to use the equity you’ve built up in your primary home to purchase a second property. Second mortgages are also known as a home equity loan; not to be confused with a HELOC.

A second mortgage is an additional loan that is secured against the property you already have a mortgage on. With traditional second mortgages, you can borrow up to 85% of the appraised value of your home, minus what is left to pay on the first mortgage.

Like the primary mortgage, you make monthly payments on the second mortgage. A second mortgage is a great option for those who can comfortably afford to make two monthly mortgage payments.

Home Equity Line of Credit (HELOC)

Homeowners can use a HELOC to access funds to help them buy a second property. But homeowners need to have at least 20% equity built up in their property and good credit. With a second mortgage, you get a lump sum payment up front, and you need to pay interest on the entire sum. A HELOC is a revolving line of credit that accesses up to 65% of the value of the first property. On a HELOC, you only pay interest on any money you use.

If a homeowner does not have 20% equity built up in their property or they have bad credit, it makes more sense to take out a second mortgage.

Will You Get Approved for a Mortgage on a Second Property?

When buying a second property, you still need to go through an approval process. Just because you already own a home does not mean that the big banks will automatically approve you for a new mortgage for a second property, though.

The approval process to buying a second home is very similar to buying a primary residence. Traditional lenders will look at your employment history, financial information, credit history, and details about the second property.

If you’re self-employed or work on commission, it might be difficult to get a mortgage to buy a second property because your income stream might be unreliable.

Because of stricter lending rules, homebuyers also need to pass a stress test, which ensures they can afford the mortgage if interest rates rise. For a five-year fixed mortgage, homebuyers need to qualify for whichever rate is higher: The Bank of Canada’s posted rate or the rate on the mortgage plus 200 basis points.

Stricter lending rules like the stress test are taking the wind out of Canada’s housing market. In 2018 alone, it is estimated that the stress test prevented 40,000 home purchases.

Like the primary mortgage, you need to have a down payment of 5%, 10%, or 20%. As with a first mortgage, the most popular down payment used for buying a second home is 20%.

Canadalend.com, Helping Your Secure a Better Mortgage for Your Second Property

If you’re thinking of buying a second property contact the licensed mortgage experts at Canadalend.com.

In addition to being licensed, the mortgage professionals at Canadalend.com are also independent. That means they work to help you find the best mortgage at the best rates. In fact, Canadalend.com has access to hundreds of different lenders, many who specialize in providing mortgages to those who have been turned down by the big banks, have unreliable income, have declared bankruptcy, or have bad credit or no credit.

To find out what kind of mortgage you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

One of the key elements of owning property is maintaining or increasing the value of your investment so that when it comes time to sell, you turn a profit. While general upkeep and repairs are essential, renovations, extensions and additional amenities can all add to the value of your property. But how can you free up the money to do that?

Refinance and Build

The most direct option is to consider refinancing your existing mortgage arrangements. By shopping around you can find alternate schedules or lower rates of interest that free up some of your income each month.

If you are embarking on a long-term project, where work will be undertaken (and services or materials paid for) monthly, then having that extra cash flow each month allows you to plan and budget more effectively. Alternatively saving the money each month for a period, such as a year, can total a significant sum that can be used as a deposit or full payment for improvement works.

When you consider alternative finance it’s best to begin by determining your budgetary needs. Once those are set, you can start looking for a financial product that will allow you to meet the targets you have. Also, be mindful of what fees you may incur for switching products and to include this in your calculations. If you are looking at a decreased interest rate, you should look to decrease by at least 1.5% to have the desired money-saving effect. 

Home Equity

Refinancing is an option during the earlier phase of your mortgage, but the later into the schedule you are, the less likely you are to be able to make a saving. At this point, a Home Equity Loan would serve your needs much better.

With a Home Equity Loan, you can borrow money against the equity that has accrued in your property. This type of loan comes with its own schedule of repayments and would allow you to put the borrowed sum directly to use for the construction plans you have in mind.

This is particularly useful if you have a large-scale project with constant work going on. Having a lump sum available for works means they can continue unabated and you can start to benefit from the additional value the works bring to your property.

Construction Mortgages

In general, a construction mortgage is designed to support people who are building their home from scratch. They differ from domestic mortgages in both their structure and the rigor taken by lenders during the assessment phase. Installments of the loan are then issued to the borrower at key stages through the building process.

Some lenders offer a variant of this type of loan for specific construction work. Additional buildings on your land for example. This loan is closer to a standard loan in structure as it does not build upon your existing circumstances, though in some situations you may be required to offer a guarantee against the loan. These kinds of conditions vary from product to product, as do the schedule length and interest rates.

Finding What Works

What’s clear when you start to investigate any of these options is that the variety of products is huge and that the criteria within them also vary greatly. It can become dispiriting having to plow through brochure after brochure, website after website, to try and find that elusive product that gives you what you need.

At Canadalend.com all our advisors are independent experts. Unlike other institutions, we don’t incentivize them to recommend products that aren’t right for you. Instead, they use their years of experience to find the best product for you from thousands of potential lenders.

Contact Canadalend.com today to find out how much time and money you could save.

It used to be that the three long term commitments in a person’s life were their job, their marriage, and their mortgage. Over the years there has been a decline in the job-for-life ethos and social change has meant people may live together for many years without getting married. The mortgage, however, has stayed relatively similar to how it was, aside from the continuing cycle of rate changes.

What has become increasingly common is homeowners utilizing a second mortgage, either for a fixed sum or line of credit, for personal or property-based reasons.

How Second Mortgages Work

Primary (or “First”) mortgages are a straightforward concept, you borrow a lump sum to purchase a property and pay back the loan, with interest, using the house as a guarantee. A second mortgage takes a more refined approach.

A second mortgage is levied against the equity that has accrued in your property over time. The equity increases in value in several ways; it increases as you pay off your primary mortgage, as the real estate market grows in strength, and when you improve the property’s value through regular maintenance and improvements.

While a primary mortgage is a fixed amount lump sum, secondary mortgages can offer an additional line-of-credit option. With a line of credit, you make the same basic agreement with a lender, a total amount versus the equity value in your property, but you do not have to take the whole sum. Instead, it can be used as a fund that you draw upon as and when needed up to the maximum agreed with the lender.

With both types of loan, fixed and credit, lenders will determine your equity value and then allow you to borrow up to a certain percentage of it, usually topping out at around 80%. This is to protect lenders and borrowers from changes in the market and personal circumstances.

Second Mortgage Rates

Both the lump sum and credit options come with the expected rate options; fixed or variable. While there are many lenders, with many different options, the general rule of thumb is for lump sum loans to include a fixed rate option and for line-of-credit loans to be based on variable rates.

It is also worth noting that interest rates on secondary loans are higher than those on primary loans. This is to protect lenders in the event of foreclosure. If you have a primary mortgage with one lender, and a second with another, the primary mortgage gets paid off first by the foreclosure, with anything remaining going towards the secondary loan.

As with any kind of loan be prepared to do some extensive reading on the proposed fees and penalties associated with your loan. These can run the gamut from paying for credit checks in advance of a loan being approved, right through to closing fees at the end of the loan’s schedule or for early repayment.

What Second Mortgages Are For

As noted above one of the factors in increasing equity value is repairs and improvements to a property.

The core idea of borrowing to make these kinds of improvements is raising the value of your property by a sufficient amount that makes repayment of the loan easier when the time comes to sell. There can also be ancillary benefits to making ecological improvements to a property. Reducing the carbon footprint, or raising the energy profile, of a property can have a tax-deductible benefit to it. This varies across provinces, but it is worth considering if a loan for these alterations could have a tax benefit for you.

A second mortgage can also provide more personal support in the form of debt consolidation. Access to a lump sum can allow borrowers to pay off multiple debts and reduce the total amount of interest they are paying on those debts. By focusing the debt in this way, it becomes more manageable, the risk of defaulting any particular loan is reduced, and a continual series of on-time payments can improve your credit score.

Choosing a Second Mortgage Product

Second mortgages are no different to primary in that there is a great diversity of products available for lenders to choose between. Each with a different set of rates, schedules, penalties, and small print clauses. Borrowers want to get the best deal they can, one that matches their needs, but the sheer breadth of choice can be overwhelming.

At Canadalend.com we have a dedicated team of experts who have decades of experience connecting borrowers to the products that fit their needs and expectations. They can do this because they work independently of any lending organization. They are not being incentivized to sell you a specific product, they work with you to find the right product for you.

Whatever your circumstances, whatever your reasons for considering a second mortgage, contact Canadalend.com today to start exploring your options with one of our experts.

Within Canada, for a variety of reasons, citizens are taking full advantage of second mortgages. Whether combining credit cards, paying for home repairs, or buying property, funds from a second mortgage improve a borrower`s situation.

The key question for many borrowers is, of course, who will lend me the money? A hundred, or even fifty, years ago the potential answers to that question were few. Banks had the majority of the loans with credit unions holding a small share of the lending business.

In 2020, there are three categorizations of lenders. The A-lenders are the traditional lending institutions, banks and credit unions. Next are the B-lenders, who despite their B status, often offer a service on a par with the A-class. B-lenders account for a smaller share of the market but can offer better rates and have a lower threshold for entry. They can work with borrowers rejected by the A-class.

Finally, there are private lenders who specialize in bespoke lending arrangements which may carry more risk. These loans can be highly specialized and are used when a different kind of thinking is needed.

Credit Unions

Credit Unions are formed by people pooling their money. They buy shares in the union and the money they use is put in a collective pool. This pool is then used to create loans with an emphasis on “people helping people.” The union is owned and operated by the people that buy shares. As such, credit unions enjoy tax-exempt status and operate on a not-for-profit model. Their loans can be structured in a way that a bank’s loan cannot.

One of the biggest changes to Canadian mortgaging in the last ten years has been stress testing. Stress tests are designed to make sure that people getting a mortgage can afford it. As a side effect, it also keeps people who could afford a mortgage, from getting one. Increasingly, credit unions have been filling that gap with loans that do not need stress testing.

B-Class Lenders

Often B-Class lenders are viewed as exactly that, B-Class. There are certainly some lenders that behave badly in both classes. Not being a bank doesn’t immediately mean a B-Class lender isn’t a good choice.

B-Class lenders are many different kinds of companies. Sometimes they can be businesses that are looking to loan money. They can be private groups operating in a similar way to a credit union. They might also be smaller financial companies specializing in loans and nothing else.

What these companies all have in common is a desire to lend money. As they are not financial institutions, they do not have to meet the same criteria as banks do. They can offer second mortgages without the need to stress test for example. B-Class lenders compete with the A-Class by offering a high standard of service to more borrowers than the A-Class can.

When you work with a B-Class lender you can expect a slightly higher interest rate on your loan as they do work with slightly riskier investments. Shopping around can help you find a good product with the right rates. It’s even possible to find rates that are equal to or lower than those offered by banks. Getting the best interest rate, fixed or variable, can save you tens of thousands of dollars on your loan.

Finding Solutions

Those who wish to borrow, face many choices. They could connect with one of the many Canadian credit unions. They may be best suited to working with one of the many B-Class lenders. Working out what’s going to be best, short and long term, can be tough.

Canadalend.com’s financial experts give you clear independent advice. This is because they are exactly that, independent. Unlike at a bank they’re not incentivized to sell you unsuitable financial products. Instead, they can find the lender and product that’s going to best serve your needs.

Get started by contacting Canadalend.com today to discuss your needs so that we can find the right lender for you.