A second mortgage is when an additional loan, from a different lender, is taken out on an already mortgaged property. When the mortgage holder makes payments on the second mortgage, they must continue to make payments on their first mortgage. So how does a second mortgage work? The amount you can borrow will depend on the equity accumulated in your property. For example, suppose your home is worth $400,000 and your first mortgage balance is $100,000. The total amount for a first and second mortgage can be up to 80% of the value of your home, so your second mortgage could be up to $220,000.
What about qualifying for a second mortgage?
Second mortgage lenders tend to give more weight to the amount of home equity than to your income or credit score. So if you’re thinking about getting a second mortgage, it’s important to understand how much equity you have in your home. If you qualify, you may be wondering how paying off a second mortgage works. Usually, second mortgage terms are for a year or two, during which time you only have to pay the interest. At the end of the term, you must either repay the entire loan, extend the loan for another term, or take out another second mortgage to pay off the first.
Why are interest rates higher on a second mortgage?
The second mortgage lender takes on more risk than the first mortgage provider because they are second on the title. For example, if a homeowner default on their payments and the property is repossessed, the first mortgage lender would be paid first. The lender of the second mortgage runs a greater risk of not being repaid in full, and so because of this added risk, second mortgage rates are generally higher than regular mortgage rates. When comparing a second mortgage to a home equity line of credit, for example, second mortgage rates are almost always much higher.
Can you get a second mortgage if you have bad credit?
People often ask us this question. Many second mortgage lenders will even give them to those with bad credit, including those who have previously declared bankruptcy or filed for bankruptcy. To get a second mortgage despite having bad credit, the loan-to-value ratio is the most important aspect: what you owe in total in mortgages must be less than 80% of the value of your home. So when would a second mortgage be a solution for people with bad credit? Mortgage brokers have access to dozens of private lenders, many of whom would lend even to those with a credit score in the 500s, as long as the loan-to-value ratio of the second mortgage remains below 80%. . When you have bad credit, it’s much easier to get a second mortgage than a home equity line of credit. However, taking out a second mortgage when you have bad credit will mean higher interest rates (often 10% or even more, depending on your credit rating). So can you get a second mortgage even with bad credit? Generally, yes, as long as there is a sufficient amount of equity in your property and you are willing to pay a high-interest rate. can you get a second mortgage even with bad credit? Generally, yes, as long as there is a sufficient amount of equity in your property and you are willing to pay a high-interest rate. can you get a second mortgage even with bad credit? Generally, yes, as long as there is a sufficient amount of equity in your property and you are willing to pay a high-interest rate.
Many Canadians choose a second mortgage for reasons like these:
- Consolidate high-interest debt
- Pay medical bills or unexpected expenses
- Make renovations to the property
Advantages and disadvantages of a second mortgage
Advantages of a second mortgage:
- You don’t have to pay off your current low-interest mortgage and pay penalty fees.
- Since there are many providers, both institutional (banks and credit unions) and private (lenders/mortgage providers), it is easy to get one, especially compared to home equity lines of credit.
- Most second mortgages interest only and have terms of one year.
- Up to 80% of the appraised value of your home can be used for a second mortgage, minus the remaining balance of the main mortgage.
Disadvantages of a second mortgage:
- Interest rates are higher for a second mortgage than for the main mortgage because the lender has to take on more risk. Compared to a home equity line of credit, the rates for a second mortgage are relatively higher.
- A second mortgage can sometimes lead to foreclosure when a homeowner defaults on their loans. The lender of a second mortgage can buy out the main mortgage and then seize the residence, thus the owner loses his residence at the hands of the lender of the second mortgage.
- Amortization can take up to 25 years for a second mortgage, but repayment may be required in as little as one year, depending on the loan structure.
- Interest rates are higher than regular mortgages but are still often lower than very high credit card rates or unsecured lines of credit.
Who is eligible?
Since second mortgages are risky for lenders, to qualify, one must meet the following criteria:
- Equity: The higher the equity in an applicant’s home, the more likely they are to qualify for a second mortgage.
- Income: Lenders must ensure that an applicant can make payments. Thus, a reliable source of income increases the chances of qualifying for a second mortgage at a lower rate.
- Credit Score: An applicant’s credit score can determine the second mortgage interest rate. In general, the higher the credit rating, the lower the interest rate will be.
- Property: Lenders must guarantee their investment in the applicant’s property if the applicant fails to make all of their payments.
If you’re retired and don’t qualify for a second mortgage because of a low credit score or lack of income, for example, there’s another option. A reverse mortgage can be a viable solution to replace the second mortgage for retirees.
How does a second mortgage compare to a home equity line of credit?
Usually, a home equity line of credit is a better option from an interest rate perspective, as these are much lower. However, home equity lines of credit (MCH) are more difficult to obtain. Here is a comparison between the two:
Proof of income required? Yes No
Credit rating required 640 and +
740 and + for the best rates As little as 550, sometimes less
Bankruptcy or composition proposal is taken into account? No Yes
Missed Prime rate + 0.5%
(usually) Between 8 and 18%
Repayment Permanent credit, therefore indefinite Must be repaid or renewed after the term
A reverse mortgage is a better option than a second mortgage
Now that you know what a second mortgage is, is it right for you? If you are a Canadian homeowner aged 55 or older, a good home equity loan option would be the reverse mortgage. The CHIP ® Reverse Mortgage, like a second mortgage, is a loan secured by the value of your property. It provides the owner with the possibility of accessing part of the value of his residence without having to move or sell it. The biggest advantage of the CHIP Reverse Mortgage over second mortgages is that it requires no regular payments until the homeowner moves out or sells their home.
Advantages of a reverse mortgage:
- You retain title
- No monthly payment to make
- You do not have to prove that your income is sufficient
- No repayment is necessary until you move out or sell the residence
- You can get up to 55% of the assessed value of your home in the form of tax-free cash
Disadvantages of a reverse mortgage:
- Since you are not required to make monthly payments while you live in the residence, interest rates are slightly higher than for a traditional mortgage
- You must be at least 55 years old to qualify
To learn more about the CHIP Reverse Mortgage in Canada or for a free information guide, call us at 1-866-522-2447 to see if the CHIP Reverse Mortgage is a great financial solution that can help you increase your retirement income.