If you’re a Canadian homeowner, you’re probably familiar with the term “second mortgage.” Second mortgages are one of the most common borrowing tools for people who are in the process of building up home equity, and are often used as an alternative to a line of credit or an unsecured loan.
But what is a second mortgage, and how does it work? What are the benefits of getting one, and what does the application process involve?
In this article, we’ll explore the main benefits of a second mortgage as compared to other types of loans, and discuss some of the ways that homeowners can use a second mortgage in Toronto to strengthen their financial position by consolidating debt.
How is a Second Mortgage Different from a Home Equity Loan or Refinancing?
One of the things that can make understanding what is involved in taking out a second mortgage difficult is the terminology itself. When looking at borrowing options based on the value of your home, you’ll quickly come across three distinct terms:
- Second Mortgage
- Home Equity Loans
Understanding the crossovers and distinctions between these three terms can help you find the option that is best for your need.
“Second mortgage” and “home equity loan” are often used interchangeably in Canada, though technically a second mortgage is a particular type of home equity loan (a home equity line of credit, or HELOC, being the other).
Unlike the mortgage refinancing process, in which you replace an existing loan with a new loan (usually at a lower interest rate), a second mortgage is an additional loan taken out against the equity you currently own in your home.
How Does a Second Mortgage Work?
A second mortgage is a financial arrangement by which a homeowner borrows against their home equity to secure funds for things like debt consolidation and renovations. How much they are able to borrow depends on how long they have had their mortgage, and what their home is currently worth.
When getting a mortgage, most Canadians will make a down payment of 5-20% of the home’s value, and the rest of the equity will belong to the bank. Initially, most of a person’s mortgage payments will simply go toward the interest on the loan, but as progress is made on the principle, the amount of equity held by the homeowner increases.
For example, if you purchased a home for $500,000 ten years ago, and have $300,000 left on your mortgage, you will have $200,000 of equity in the home. But if you bought in a high-growth market, your home is now worth $650,000, you have even more equity available to you — you still only owe $300,000, but the increased resale value of the home means you have built up $350,000 in equity.
Because this represents a tangible asset you currently hold, you can use it as collateral for a debt. This means that home equity loans taken out on the strength of that asset allow you to borrow significant amounts of money without having to pay exorbitant interest rates.
What Can You Do with a Second Mortgage?
Technically speaking, you can use the money you free up through a second mortgage to do anything you like. But given that a second mortgage can extend the amount of time before you own your home outright by several years, most financial advisers will recommend that you use a second mortgage as a strategic investment rather than for consumption.
Three common examples of this are:
- Debt Consolidation: Unsecured debt from credit cards and payday loan companies is a huge burden for Canadians. At the end of 2019, the average person had $23,800 in non-mortgage debt, much of it in high-interest credit card loans. Using a second mortgage to consolidate debt and secure lower monthly payments with less interest is one of the best ways to get unsecured debt in check.
- Renovations and Repair: When your roof is leaking or your pipes burst, you can’t afford to wait until you have money for repairs — every day that goes by exacerbates the problem. Taking out a second mortgage is the fastest way to cover these expenses so they don’t cost more money in the long term.
- Student Loans: Over the past twenty years, university tuition fees have skyrocketed, meaning that most students now need to take on significant debt in order to graduate with a bachelor’s degree. Whether you’re a parent about to send your kids to school or a student still paying down debt or, a second mortgage can be a cheaper way of financing education or repaying a loan.
When used wisely, a second mortgage from Burke Financial puts you in a stronger financial position and helps ensure that the extra debt you take on now saves you money in the long term.
How to Apply for a Second Mortgage
Many financial institutions offer second mortgages, but finding the one that is best for you will depend on your personal financial situation. For example, many banks require a minimum credit score and a regular source of income before they will consider offering a home equity loan, and this can leave many Canadians unable to leverage the value they’ve built up.
At Burke Financial, we specialize in helping a wide range of clients with many different financial needs, and are committed to making sure that anyone who needs a second mortgage is able to access one. As an alternative subprime mortgage brokerage specializing in residential clients, we have extensive experience connecting people with credit scores below 650 with lenders willing to take on the risk.
We understand that if you are in urgent need of money, you don’t have time to go through a lot of hoops to secure a home equity loan, so we offer a seamless online application process. If approved, you can receive your funds in as little as two days (you can contact us today if you want to know more about our application process).
With regulations tightening across Canada, alternative mortgage brokerages like Burke Financial have become an essential lifeline for homeowners who would otherwise have trouble leveraging their assets. If you want to take charge of your finances in 2021 and want to access the benefits that come with a second mortgage, call Burke Financial today.