If you currently own a house or condo, and have equity in the home, then you may be eligible for a 2nd mortgage.  A second mortgage is really just another way of borrowing money, and will typically allow you to borrow more than you would normally qualify for, as it is secured against the equity in your home.   There are a number of reasons why someone would need a second mortgage.  It could be to purchase a car, to start a business, tuition, renovations, to consolidate debt, investment, or for any other reason where you may need money.    

A second mortgage can typically be arranged up to 85% of your home’s value (more commonly referred to as Loan To Value or LTV).  They can also be set up in the form of a line of credit, or can be a closed mortgage with fixed monthly payments.  In some cases, you may be able to arrange for a second through your bank at a rate not too much higher than you are paying on your first mortgage, but it can be tougher to qualify. This is where I encourage people to start, as mortgage brokers do not have as many low rate options for second mortgages as they do with firsts, although it never hurts to shop!   

The lowest cost form of 2nd mortgage would be set up as a HELOC (Home Equity Line of Credit), where rates are usually around prime +0.50% (4.45%).  There are usually no fees involved with setting up a HELOC other than legal and appraisal fees, which usually amount to around $1,000.

If your bank turns you down, then it’s time to turn to a mortgage broker.

Qualification is based on your credit, income, the location, and condition of your home, and of course, the amount of equity available.  In situations where you will not qualify for a traditional HELOC, interest rates can be anywhere from 5.99%  and can go up to 15%, or even higher.  If you have better than average credit, and are leaving about 35% equity in your home after the second mortgage, then you will most likely qualify for a rate at the lower end of the spectrum. The lower rate mortgages would be set up through a financial institution, and if you don’t qualify or fit their guidelines, then your second mortgage would be placed with a private lender.  Over and above the rate, 2nd mortgages carry fees which can range anywhere from 2% to 10%, depending on the loan size. For this most part, these types of mortgages are used for anyone who is in need of money, but have been turned down by their bank, and/or have no other place to turn. They’re pricey for sure, but they can sometimes provide a much-needed bailout of a sticky situation. They are also usually for smaller amounts of $20,000 to $100,000. Higher amounts can be provided as well, however, they can become trickier to place. Brokers do not charge fees for qualified borrowers on first mortgages, as we get paid by the lender, however, on private mortgages, fees have to be charged unfortunately.

Private lenders are not as concerned with your credit history and are more interested in the location and condition of the property. If your credit is particularly bad, then it helps if you have an explanation to help the lender better understand your situation and improves the chances of approving a second mortgage. A source of income is usually necessary, as these lenders want to see that you have the capacity to repay the loan, however as long as your situation makes sense, then there may be a way to get around the income requirement. 

Chances are that if your home is in good condition, and in a decent area of a major metropolitan centre, such as the Greater Toronto Area, then a good mortgage broker should be able to get you 85% LTV on your second mortgage.  Keep in mind however that 2nd mortgages up to 85% can carry an interest rate of 11% plus.

 

Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.