Second Mortgages – How do they work?April 1, 2013
Many Canadians use a second mortgage to help achieve their financial goals; especially with the low mortgage rates that we’re seeing in today’s marketplace. Learn about second mortgages, their benefits and how to qualify.
What is a second mortgage?
A second mortgage is a home equity loan that allows homeowners to borrow money from the equity in their home, without refinancing their current mortgage. Equity is the difference between the appraised value of the home and the amount owed on the first mortgage. The loan amount available is based on the equity in the home.
Benefits of a second mortgage
- The ability to consolidate debt that has high interest into one low interest rate monthly payment.
- Can be used towards home improvements and major purchases.
- Great way to finance a small business in a cost-effective manner.
- Help pay for college or university for your child.
How to qualify for a second mortgage
You must have over 20% of equity in your home and be able to pay the monthly payments on your second mortgage without exceeding your Total Debt Service Ratio (TDS). Those with low credit scores may still be eligible for a second mortgage albeit at a higher interest rate than those with better scores.
Lenders also look at the length of time that you’ve been working with one employer. This provides a sense of security to the lender and makes it easier to qualify for a second mortgage. You typically have to be off your probationary period of six months and show previous employment history of six months or greater.
You must bring your mortgage papers and social insurance number, proof of employment and bank statements when applying for a second mortgage. Ask your lender in advance to ensure you have the appropriate documentation.
Additional costs of a second mortgage
Be prepared that you will need to pay closing costs with a second mortgage as well. They typically run from 2 to 5% of the value of your second mortgage. These costs may include:
- Home appraisal fee
- Legal fees
- Title search
- Title insurance