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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.

When it comes to getting a second mortgage, you’ll need to go through an approval process. Mainstream lenders, such as banks, will emphasize different things over alternative lenders. While there is no standardized process for either group, we’ll take a look at some of the factors that come up repeatedly so you can be prepared.

Canadalend.com can help navigate your mortgage needs no matter your Income

Lenders will want to know that you have money coming in to repay your loans. Mainstream lenders prefer to see borrowers with regular income. Such as a monthly salary. They may also ask that you undertake employment verification, depending on your circumstances.

Alternative lenders like to see regular income too, but they can be more flexible. People with irregular income, freelancers, or the self-employed, can find more accomodating arrangements with alternative lenders.

Utilizing Your Equity

When you take out an initial mortgage, the lender gets what is called a lien on the property. That’s the right to sell the property to settle a debt. Over time, as you progress through the schedule of a mortgage, you accrue equity. As you make monthly payments to pay down the outstanding amount, you start owning more of the property.

Lenders that offer second mortgage products have a consistent view. While they’re happy to leverage equity that you have accrued, they’re aware of that lien the other lender holds on the property. That means if you default on your mortgages, the first lender gets paid first, and the second may get nothing. Because of this, equity-based second mortgage loans carry a higher amount of risk for the lender.

If you intend to utilize equity against a second mortgage, you’ll need an up-to-date statement of account from the initial lender.

Canadalend.com can assist no matter your Credit Score

One of the earliest steps to take before beginning your search for a lender is to check your credit score. There are multiple ways to do this, but as you are about to enter a financial process, the more in-depth the better.

In Canada, credit scores run from 300-900 and are determined by Equifax and TransUnion. A score above 650 is seen by many lenders as the ideal scenario. If a score is below 600, then a borrower should start to expect some additional conditions or constrictions regarding their loan.

Credit scores are essential no matter who you borrow with. Working with traditional banks, they form a core part of the approval process. Alternative lenders place less emphasis on credit score, preferring the ability to pay over a solid credit history. This is particularly useful to those seeking a second mortgage for debt consolidation. Alternative lenders specialize in helping people recover from past errors of judgment.

Navigating the Process

Which documents to have prepared, and when, can be a frustrating part of the process. With each lender doing things differently, how can you try to bring some consistency to the process?

The one thing all lenders have in common is that you will need to provide identification documents. The number required, and their type, is at their discretion. But, as with most matters of identification, government-issued documents are best – passport, drivers license, etc.

At Canadalend.com, our independent experts are well versed in the approvals process with many different lenders. Decades of experience and access to hundreds of different lenders mean they can help you find the right product for you. It also means that they are experienced guides when it comes to finding your way through the approvals process.

By contacting Canadalend.com today, you can speak to one of our experts, find a product that suits your needs, and get support to navigate the approval process successfully.