Thinking About Getting a Second Mortgage? Read This First!


When one mortgage isn’t enough…

Actually, a second mortgage usually refers to the idea of taking out a second mortgage on the same home where your first mortgage is. A second mortgage is usually a way to get a lump of money all at once for something that you need. It’s also known as a ‘home equity loan’ because you are borrowing money against the equity you have built up in your home. With rates historically low in Canada for second mortgages, plenty of people are considering them as a source of lump money to fund other things such as paying down consumer debt or undertaking home renovations. If you are considering a second mortgage, this is the article to read.

Consider the Pitfalls First

Before you start shopping around for a second mortgage, you should consider the following pitfalls and make sure you can deal with them:

  • Is refinancing out of the question? Refinancing your mortgage is generally better than getting a second mortgage. You might get a better rate and you still retain the equity in your home
  • Are you ready to pay higher interest? Because you are taking out a loan against a major piece of collateral, lenders will charge a higher interest rate in order to make their money
  • Can you pay the fees? Fees on second mortgages are usually pretty high and there is a lot of paperwork. Furthermore, you may need another appraisal and that means more money going out. It may not be worth it!

If these pitfalls can be overcome and they are worth dealing with in order to get the second mortgage, then carry on!

What Conditions Will Need to be Met?

What conditions does a second mortgage have in order for you to be eligible? Second mortgages are fairly stringent, simply because most lenders are a little twitchy about issuing a home equity loan against a home that still owes money. You will have to meet the following criteria if you’re going to get a second mortgage:

  • Good credit history. Make sure your credit history is as squeaky clean as possible. You should have no debt repayment defaults, no bankruptcy and really, as little consumer debt as possible. A bad credit history will make lenders think that you are more likely to default than someone with a good credit history and thus you are more likely to be turned down.
  • Steady income. Make sure you have steady income in the household so that you can pay off the loan on your home. You may have to show your income using a pay stub or an income tax return.
  • You have to own a certain amount of equity already. If you’re working with a large lender, you will probably need to have more than 20% of your equity intact. Private lenders may give you a loan with less, but you’ll have to ask around. The more equity you have, the easier it will be to get the loan (and you can opt to get a larger loan if you like). Keep in mind that your equity is not going to be the amount of money you’ve paid into your home; instead, it’s based on the market value of the equity which could be higher or lower, depending on the value of your home overall.

Your Original Lender of a New One?

You can get a second mortgage through the original lender, or shop for a new lender. Make a careful decision because you could end up saving a great deal of money on your loan if you’re savvy.

A second mortgage or home equity loan isn’t the best way to get more money, but if you’ve exhausted other avenues, then it’s certainly a way to go. Just be sure you can pay off the loan or else you could severely damage your credit, not to mention the equity in your home. Be smart and careful and you can make your homework for you!

If you have additional questions about this topic or others, please contact us at Higgelke Mortgage Group.