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Mortgage Calculators
A Guide to Second Mortgages in Ontario
A second mortgage is a robust investment and renovation tool available to Canadians who are already paying down a mortgage at their primary home. These mortgages are referred to as second mortgages as this is an additional loan on a property or land. The mortgages are a risk for lenders, as if the borrower was to default, the primary mortgage would be paid out first. Thus, lenders have high standards for a borrower to qualify for this mortgage type.
Borrowers who have an existing mortgage, good credit, and more than 20% equity in their home can qualify for a second mortgage. In terms of mortgage type, most lenders will provide a home equity loan. While if a borrower has a weaker credit score and less equity in their home, the borrower may leverage a second mortgage through a private lender or trust company.
Borrowers should know that second mortgages do have a higher mortgage rate than a typical mortgage. If they look at an equity line of credit, the mortgage rates will be only slightly higher, while a second mortgage through a private lender may be significantly higher than the prime rate and advertised rate. Check out our mortgage calculator to check current second mortgage rates, and play around with some numbers to see what you could expect before chatting with a mortgage broker or lender.
Why a second mortgage might be a good idea
There are several reasons why a second mortgage might be a good fit for your financial situation. Here are a few we have seen over the years.
Debt consolidation
Generally, a second mortgage is used by a borrower to consolidate debt. Whether you are looking to pay down a student loan, line of credit or significant credit card debt, a second mortgage might be a tool that will help. The reason for this is although the mortgage rate is higher than your primary mortgage, the interest rate is typically lower than other debts.
For instance, if you have a credit card at $10,000 and 20% interest and a minimum payment of $200, you will pay $11,680 in interest alone. It will also take you 109 months to pay off the balance. While if you have a second mortgage at 5%, your interest would only cost you $1,236. This is a significant difference and part of why many Canadians have chosen this kind of financial tool. You can further look at other debts and see why the mortgage rates of a second mortgage is an innovative and often calculated tool to help with personal debt.
Helping a child out with tuition
Another great use of a second mortgage is to assist your child with their university of college tuition. Although other vehicles such as RESP can help, a second mortgage may provide a better rate than a traditional student loan. This is especially true if you make a significant amount of money and your child does not qualify for federal or provincial loans. Student lines of credit can be expensive, and in some instances, a second mortgage is a better financial decision for both yourself and your child.
Floating you during job loss
Depending on your situation, you may need to use a second mortgage to help finance your living costs after a job loss or moving to part-time. Many Canadians have started to look at this option as COVID-19 has ripped through the country, and thousands of Canadians are struggling to make ends meet. This lifeboat is one of the best ways to avoid high-interest things such as credit cards and other loan mechanisms. Plus, it is a viable vehicle to ensure your financial future can be quickly sorted with low-interest rates.
A down payment for an additional property
If you are starting to look at investment properties but do not have the 20% for the down payment, a second mortgage may help. Whether you are looking for an investment property or a vacation property, a second mortgage could be the right decision depending on your situation. This is especially true when you consider the current market and how hot it is. From rental properties in downtown Toronto to a cottage in the north, this could be a great option to secure your subsequent real estate move funding. We would suggest chatting with your financial advisor or a mortgage broker to ensure that this is the right decision for your financial future and investment in real estate.
Medical treatment costs
Depending on your situation, you may be facing a significant expense like medical treatments and not sure where to turn. Here in Ontario, not every medical cost is covered through OHIP, and clinical trial or experimental drugs may not qualify. This is why many who have rare diseases or advanced cancer diagnoses choose to get a second mortgage to fund their medical treatment. Much like many of the reasons to get a second mortgage, it will be best to chat with your financial advisor to see if this is the right fit for your financial future.
We will note, unlike your traditional loans or line of credit, it is not often a wise decision to use a second mortgage for a vacation fund or other funds. This tool is not easy to secure and should only be used for specific instances. It is best to chat with a mortgage broker or a certified financial advisor about your particular financial situation.
What do you need to qualify for a second mortgage?
Equity
The amount of equity you have in your home is directly related to the chances you qualify for a second mortgage. The reason for this is tied to the way that default works for lenders. The primary mortgage is first to be paid out, which means the second mortgage is at risk of not being paid out if there is not enough equity in the home to cover the total mortgage taken out. Thus, the more equity you have, the easier it is for lenders to take the risk on a second mortgage on your property.
Income
Like any mortgage application, getting a second mortgage will require you to pay down your mortgage, and the only way to do that is with income. Lenders will look for dependable and regular income, so they can ensure that you can make payments over the mortgage amortization period. If you are self-employed, you may have to provide additional data and documents to show that you have a history of income over an extended amount of time. Stable jobs like banking and government make things a little easier for lenders to approve the 2nd mortgage.
Credit Score
Naturally, lenders will want to look at your credit score and the history of your payments on that financial instrument. A better credit score will showcase that you can regularly pay off credit cards, loans, and other financial tools. Simultaneously, poor credit scores may be a red flag for a lender already taking a risk on a second mortgage. To check your credit score, you can use several free resources, including Equifax and Credit Karma.
Property Details
As the lender will be taking a risk, they will want to secure the investment via your property. They will want to know about the home's appraised value, the area in which you are located, and the house's current condition. Long story short, the lender will want to know if you default; they can still recover their money with the current market, the home you own, and the current equity you have in the property.
Which lenders offer second mortgages?
When it comes to second mortgages, not all lenders are in a position nor want to get into the business of offering these types of mortgages. A lender will consider offering these vehicles if the risk portfolio is solid, and it will also depend on the current market trends. Today, most larger banks offer second mortgages, and as do specific smaller lenders.
Equity line of credit
Your current mortgage provider probably has an option in terms of a home equity line of credit mortgage. Some smaller lenders do not offer this option, but your big five banks and most credit unions will have it within their possibilities. This loan type will require you to have at least 20% equity, and the calculation can be found below.
Private Lenders
On the other side, private lenders are plenty, and you will have to search out the best option for you moving forward. Mortgage brokers can help in this search, as you will want to pick a private lender who can deliver a beneficial second mortgage and not overcharge you for a product that you might not need.
Trust Companies
Finally, trust companies also exist and can provide you with a second mortgage at a steep price compared to home equity loans. Companies such as Home Trust and Equitable Trust are the leaders and advertise heavily to older folks looking to consolidate debt in their senior years.
No matter who you choose, you should look at the fine print and make sure that you understand the terms and conditions of the mortgage you are signing. We will go into detail about this down below.
How much can you borrow with a second mortgage?
The amount that you can borrow on your second mortgage is designed around how much equity that you have built up in your property over the years. Whether you have just bought or have owned for years, equity builds up over time. The various lenders will all have different restrictions based on the loan to value ratio of the home. Generally, top lenders such as credit unions, smaller lenders and the big five banks will allow an individual to borrow up to 80% of the appraised value of your home minus your current primary mortgage.
So let’s assume that a home is worth $1,000,000 and that your current mortgage balance is $500,000.
Home Appraisal: $1,000,000
* Max borrow rate: 80%
Max loan on your home: $800,000
– Mortgage balance: $500,000
Total maximum second mortgage allowed under these rules: $300,000
Second mortgages that private lenders secure can be flexible around the loan to value calculations. These lenders can provide you with more money, but the fees and higher rates do cost borrowers more. Let us take a look at the same hypothetical numbers but with the loan to value numbers allowed with private lenders or trust companies.
Home Appraisal: $1,000,000
* Max borrow rate: 90%
Max loan on your home: $900,000
– Mortgage balance: $500,000
Total maximum second mortgage allowed under these rules: $400,000
As you can see, the different second mortgages have some other loan-to-value calculations. However, you also have to consider the fees and different interest rates.
Here are some examples of interest rates based on rates in April 2021
- Home equity line of credit: 4-6% depending on the lender
- Private Lenders: 10-12% depending on the mortgage lender
- Trust Companies: 10-12% depending on the mortgage lender.
Rates and fees that you can expect with a second mortgage
Second mortgage fees and rates will depend on the specific lender and various factors tied to the borrower’s income, equity in the home, property value and credit score. One thing to note, your secondary mortgage should, and often does, have a higher mortgage rate than your primary mortgage.
Depending on your loan, your second mortgage can either be a fixed or variable rate mortgage. With record prime rates and even better-advertised rates, mortgage lenders have seen a significant uptick in fixed-rate mortgages.
The fees associated with a second mortgage can also be a high cost for borrowers. You may need to pay for the following fees: appraisal fee, title search fee, legal fees and title insurance fees. These can all add up and add thousands of dollars to your search.
We should note that private lenders and mainstream lenders may have additional fees on top of the abovementioned fees. It will depend on the specific lender, and you can check out more details about that in the terms and conditions of your loan.
The Terms and Conditions
As second mortgages are a significant risk to lenders, the terms and conditions of the mortgage are often slightly different from primary mortgages. This is because if a property was to foreclose, the second mortgage is at risk of not being paid. As per the law, the primary mortgage is paid first during the foreclosure, and depending on the property, there might not be enough money to cover both mortgages.
As part of the terms and conditions, the secondary mortgage will require you to pay both the primary mortgage and the secondary mortgage payments. As a borrower, you will need to keep on top of both payments. A failure to pay either your primary or secondary mortgage may mean that your home is foreclosed on the amount borrowed. Foreclosure is not ideal, but as a borrower, you should be aware of this possibility of moving forward with a second mortgage and the financial risk inherent in this financial decision.
What documents will you need?
When it comes to your second mortgage, you will need to provide it to your lender. If you are applying for a home equity line of credit, you may need additional paperwork. In comparison, private lenders require less paperwork and forms to secure. Here is what you should expect to provide to your lender during the second mortgage application process.
ID
You should expect to provide two pieces of picture identification. For instance, you can use a drivers licence, an OHIP card, your passport, a Nexus card or any other forms of ID. Generally, your work ID does not work for lenders.
Property Appraisel
To secure your mortgage approval, you will need to provide the lender with an up to date appraisal of the property you are leveraging. This appraisal will need to be provided by a reputable appraisal company. If you do not know a reputable appraiser, you can chat with the lender, real estate agent, or local mortgage broker.
Mortgage Statement
Your lender will want to see your most recent mortgage statement for your home or property. This statement will need to show the balance remaining, the term remaining, any home equity line of credits on the property and the interest rate that you are paying on the mortgage loan. Your new lender will need to confirm the existence of your primary mortgage and any other mortgages on the property to calculate the equity on the property.
Tax Bill
Your lender will want to see your most recent mortgage statement for your home or property. This statement will need to show the balance remaining, the term remaining, any home equity line of credits on the property and the interest rate that you are paying on the mortgage loan. Your new lender will need to confirm the existence of your primary mortgage and any other mortgages on the property to calculate the equity on the property.
Credit Report
Naturally, a lender will also need to look at your current credit rating. This credit rating can be copied from Equifax or Credit Karma and will allow a lender to look at the history of payments on other loans and mortgages. It should be noted that private lenders put less of an emphasis on the borrower's credit rating than lenders who are leveraging an equity line of credit. For your credit rate, the higher the number, the better your credit rating is in Ontario.
Most Recent Notice of Assessment
If you are looking to secure a secondary mortgage in 2021, you should provide your 2020 Notice of Assessment to your lender. The NOA will show your total annual income via line 150, and it will also show any money you owe to the government in missing income tax. If you have not filed your taxes in the past few years, private lenders will look at this as a red flag and increase your mortgage rate. In contrast, the big five banks and other lenders may not loan you money at all.
3-6 Months of Bank Statements
Finally, your lender will want to see bank statements over the past three to six months to check that your monthly income will be enough to cover the second mortgage. The lender is only interested to see if you will be able to pay the interest on the loan, but most lenders in Ontario will ensure you can pay the total amount before approving an application. Ensure that the bank statements have your full name and home address visible before sending them over to your lender.