Second mortgages are one of the best ways for Canadian homeowners to turn home equity into usable cash, and if you’ve been exploring your borrowing options as a homeowner, you’ve probably been told that second mortgages or home equity loans are the way to go.
But who qualifies for a second mortgage in Canada? How easy is it to apply for a second mortgage? And how can you make sure that you get the most competitive second mortgage rates in Ontario regardless of your credit score?
In this article, we’ll be outlining some of the basic facts behind second mortgage qualification, rates, and best practices. A second mortgage can be a lifeline if you have big expenses or large unsecured debts, and understanding the factors that impact your application is the best way to get the most out of the process.
Second Mortgage Loans: Understanding the Basics
There are two basic things you need to understand when applying for a second mortgage in Ontario —first, you need to understand what a second mortgage is; second, you need to understand how this type of loan differs from other forms of credit.
- A second mortgage is a type of secured loan backed by home equity. Home equity is the amount of value you own outright in your home — essentially, the amount of money you would have left over if you sold your house and paid off your mortgage tomorrow.
- A second mortgage loan is distinct from an unsecured bank loan because it is backed by an asset: the value you have built up in your home. This makes it a less risky loan because the lender can recoup their losses in the event of a default. The main difference between a second mortgage and home equity loan is that a home equity loan is a specific type of second mortgage, distinct from a home equity line of credit (HELOC). But for the purposes of this article, the two terms can be used interchangeably.
As the name suggests, a second mortgage functions as an additional mortgage loan. You will need to pay off both mortgages in the long run, but because second mortgages typically come at a much lower rate of interest, and can be amortized over longer periods of time than unsecured loans, they can be a smart way for homeowners to borrow needed funds.
Anyone with home equity can qualify for a second mortgage, though the second mortgage rates will vary depending on your income, the amount that you want to borrow, and your credit score.
Common Questions About Second Mortgage Loans
Now that we’ve clarified what a second mortgage is and who can qualify for one, we can talk about the specifics of how second mortgages work. As with any loan, the particulars will depend on the interest rates set by the Bank of Canada and the particulars of your own financial situation, but there are a few general rules that can help you determine whether this is the right type of loan for you.
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1. How Much Can I Borrow?
One of the main benefits of getting a second mortgage for Ontario homeowners is the amount of capital they put at your disposal.
Because second mortgages are backed by your home equity, the amount will depend on the value of your home and the size of your mortgage. For example, if your home is currently worth $1 million and you have $650,000 left to pay on your mortgage, your home equity is $350,000. Should the value of your home increase to $1.5 million, you would have $850,000 in home equity.
One of the reasons second mortgages are such a powerful tool for Canadian homeowners is that they provide a way to take advantage of the real estate market boom that has been driving up house prices across the province.
A second mortgage doesn’t allow you to use all of this equity, but at Burke Financial we can offer up to 85% loan-to-value (LTV), meaning that a homeowner with $350,000 in home equity could get a loan of as much as $297,500
2. What Can I Use My Second Mortgage For?
Technically, you can use your second mortgage for anything. The money is yours, and as long as you make your repayments, you are free to do with it what you please.
With that being said, borrowing against your home value to buy a new Lexus isn’t a particularly wise choice. The Lexus will decrease in value as an asset, and you’ll be stuck with a liability in the form of your loan. For this reason, it’s a good idea to use a second mortgage to strengthen your overall financial position through investing.
Some of the most common uses for second mortgages are:
- Debt consolidation
- Home maintenance
- Real estate investing
Using your second mortgage to buy a new property is a particularly smart move as it will help you leverage your assets to grow your wealth — just make sure you don’t end up over-leveraged. The real estate market is strong, but there are signs the boom is slowing down.
3. Can I Apply for a Second Mortgage if My Credit Score is Below 650?
The simple answer to this question is “yes.” Because a second mortgage is a secured loan, you will likely be able to get a second mortgage even if your credit score isn’t ideal.
However, you will likely see a higher interest rate, and you may not be able to borrow the maximum of 85% LTV. When you borrow money, the lender is always taking a risk, and if they feel you have an inconsistent track record with credit, they will compensate for this risk by charging more.
Most Ontario homeowners have seen their home equity grow considerably over the past decade, and if you’ve been paying off your mortgage for five years, you’re likely sitting on a significant amount of value. Applying for a second mortgage from Burke Financial can help you put that value to work today.
Our second mortgage process is easy and straightforward, and if you are approved, we can send you the funds in under a week. If you want to find out whether you’re eligible for a second mortgage in Ontario, start your application today!