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Tuesday 20 November 2018
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Second Mortgage Explained

A second mortgage in Toronto is simply an additional loan taken on the same property. It allows you to borrow up to 80% of the equity value of your home minus the remaining balance on your first mortgage.

The security for this loan is your home’s equity value. Talking about repayment, the lender expects you to service the second mortgage on a monthly basis, the way you repay your first mortgage. Either the first lender or a different financing body can give the second mortgage.

How a Second Mortgage Works in Canada  

Most times a second mortgage is riskier to the lenders because they are listed second on the property’s title. Meaning if the borrower defaults, the second lender can only wait until the first mortgage is paid to the full to claim their share of repayment from the home – that is if there will be something left. That’s ideally the reason why the second mortgage will have a higher interest rate.

As in, the lender is risking more on trusting the borrower’s capacity to handle both mortgages. However still, the lender may want to check if the borrower meets the minimum requirements to qualify for the second mortgage.

Qualification Cutlines  

Before the money is sent to your account, the lending authority will look at your equity, credit score, income and the property itself. A home located in high valued areas is likelier to attract a second mortgage. Also, the higher the equity your home has the better chances of being approved for a second mortgage. A larger down payment during the onset of buying the house is another factor that gives the lender confidence.

Talking of income, lenders place more preference on borrowers who have a consistent and dependable source of income as that suggests they are able to clear the debt with less hustle. A good credit score may not be that much of a factor but it’s common sense that it will get your second mortgage request considered faster. If you already have an existing mortgage but have more than 20 percent of equity on your home and a good credit history, you can be given the second mortgage in form of property equity line of credit. Otherwise, if your credit worth is considered weaker, you can get the second mortgage under a trust company’s cover.

Why Would You Need a Second Mortgage?

A second mortgage comes with a higher interest rate compared to the principal mortgage. But again compared to other sources such as unsecured lines of credit, credit cards or car lease payments, the rates of the second mortgage often turn out to be lower which means you’ll be saving money with this mortgage.

Top on that, it’s necessity might be irreplaceable, like, for instance, you might need some money to clear the school fees for your child’s post-secondary training by taking advantage of your accumulated equity. Other homeowners use this form of a loan to consolidate their debt.




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