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There are many steps involved in buying a home, not the least of which is securing a mortgage. While this is standard for most people as they seek to buy their first home or move to another home, some owners might need to apply for a second mortgage. That means, in most cases, that they want to take out a mortgage on top of the primary mortgage to pay off debts or make a large investment, which can include post-secondary education or starting a new business.

Why Apply for a Second Mortgage?

A second mortgage is also commonly known as a home equity loan. It may seem helpful to have this option to manage complex financial matters, but it is important to not enter this arrangement lightly. For some, despite taking on more debt, it can actually help improve your credit score if you use the money for debt consolidation.

Getting Approved

It may not always be possible to get approval from a financial institution in the first place. The interest rate is usually higher and there are often penalties for defaulting, so experts recommend comparison shopping both of these factors. Still, interest rates on second mortgages are usually lower than credit cards.

Be Prepared for Fees

Each financial institutions or lenders will charge different closing costs and fees. As a result, find out in advance what these parameters are so you can create a repayment plan. Qualifications for a second mortgage are first determined by the value of your home and its equity. Income and credit history are important, but not major factors like they are with most other loan applications—including a primary mortgage.

Value for Borrowers

There is greater freedom with a second mortgage compared to other loans. In fact, borrowers can often negotiate the terms and as much as 85% of your property’s value can factor into the amount you can receive. However, not everyone will provide this option as it is riskier for the lenders. That is because, if you happened to default on your loan payments, your primary mortgage lender would be paid before your second mortgage lender.

If you are considering a second mortgage application, contact us to help you ensure it is the right move.

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.

In July 2019 the Bank of Canada released a statement anticipating stabilization within the national housing and mortgage market. It also confirmed it was maintaining the targeted 1.75% interest rate despite some future uncertainty, particularly around international trade.

During periods of stabilization like this, many homeowners take advantage of a second mortgage as a means to improve or repair their homes. Increasingly these mortgages are taken out with an interest-only repayment schedule.

Homeowners who are intending to sell their property in the short-term future take a second mortgage to pay for any work required. They pay a monthly interest payment on the full loan amount rather than a larger payment towards the interest and principal debt. Then, when they sell their upgraded property, they can pay off the loan with the extra value the improvements have brought.

Whenever a second mortgage or home equity loan is being sought for, one of the key decisions a borrower will have to make beforehand is whether they want their interest rate to be fixed, or to be variable.

Holding Steady

A fixed interest rate is exactly what it sounds like - the rate of interest paid on the principal is fixed for the term of the loan.

For borrowers, fixed rates offer consistency and a predictable payment timeline when rates are rising. No matter how much the Bank of Canada’s rate rises, they know they are locked in at the lower interest rate. Over time the total debt reduces, and the interest payment declines with it, this makes budgeting and saving money easier but doesn’t allow a borrower to benefit when interest rates go down.

For lenders fixing an interest rate also protects them against variances in financial markets. No matter what happens to the Bank of Canada’s benchmark interest rate, the rate they have on this loan stays the same. Lenders tend to prefer the dependable nature of fixed rates as an alternative to trying to forecast what will happen with the interest rate over the life of the loan.

Periodic Change

As an alternative, variable interest rates change over time. The loan will be based on an indexed rate, such as the Bank of Canada’s rate, or another benchmark interest rate such as LIBOR. The rate payable on the loan is equal to the benchmark rate plus a margin amount. So, for instance, a loan may be based on a benchmark rate plus a 2% margin. So, when the benchmark rate is 2% the loan rate is 4%.

When it comes to mortgaging, most lenders offer a product that has an initial period of fixed rates, say five years, followed by the rest of the schedule being paid according to interest rate fluctuations. The payments for the latter period are usually recalculated, or “reset”, based on the underlying interest rate every 1-5 years.

Variable rates offer borrowers a chance to make the most of their money. While interest rates are low the potential for additional payments is higher. Additional payments come off the principal loan, so when rates rise, borrowers are not as badly affected.

For lenders, variable rates offer a form of guarantee as loans come with a margin, while rates may go down over the life of a loan, they are still guaranteed to be getting more than the benchmark rate in interest payments.

Growing Interest

Depending on what you want a second mortgage for, it can be a huge influence on the kind of rate you have. If it’s for improvements to your home prior to sale, debt consolidation, or any other reason, the interest rate is an important factor in getting the best value loan.

Our independent experts have access to hundreds of lenders and their products. With decades of experience, they can find the right financial product for you and ensure that the product has the right interest rate structure for you. Their independence empowers them to find the product that best suits your needs rather than sell you whatever product their employer is incentivizing them to sell.

Contact Canadalend.com today to find out more about what options might be available to you and to speak to someone whose interest is in finding you the best financial product they can.

Contact us to learn more about the Fixed or Variable Rate Second Mortgage options available and experience The Canadalend Advantage today!

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.