The combination of unprecedentedly low interest rates and rapidly rising home values, has many Canadians who are looking to borrow turning to second mortgages. In this market especially, a second mortgage is a powerful tool that allows you to use your home equity to maximize your borrowing power.
A second mortgage is a loan that is secured by your home equity – that is the value of your home minus the amount that you still owe on it. It works much the same way that your first mortgage does – you get approved by the lender for a set amount (most lenders will let you borrow up to 80% of your home equity), you receive a cash loan, and then you make monthly or bi-weekly payments with interest until the loan is paid off.
There are many reasons for choosing a second mortgage over other types of loans. For starters, because a second mortgage is a secured loan, the interest rate tends to be much lower than unsecured loans like credit cards or personal lines of credit.
And although the interest rate on a second mortgage will be a little higher than a first mortgage or mortgage refinance, getting a second mortgage does not require you to break your first mortgage – meaning there won’t be a financial penalty. This makes a second mortgage a preferably choice over a mortgage refinance for those who have the majority of the mortgage term still ahead of them.
Another reason for choosing a second mortgage is that it is a tool that allows most homeowners to borrow a larger sum of money than they might be able to with other types of loans. As mentioned, most lenders will allow you to borrow up to 80% of your home equity. So say for example, your home is worth $800,0000 and you still owe $300,000 on it – that means you have $500,000 in home equity. So if you were approved for a second mortgage at 80% of your home equity, you would be eligible to borrow $400,000.
This makes a second mortgage an ideal tool to use when borrowing to cover large expenses like home renovations, start up capital for a business, or a down payment on another property. The low interest rate also makes a second mortgage a great tool to use for debt consolidation.
If you want to get the best rates on a second mortgage, it is important to work with a professional mortgage broker. This is because mortgage brokers have a large network of lenders that they work with, so it is very easy for them to compare rates on your behalf and even negotiate to help you get a better deal.
Aside from working with a broker, ensuring your credit is in good repair by paying your bills on time and not applying for any large loans before you apply for your second mortgage will also help you to get the best possible rate.
If your credit is less than perfect, don’t worry. You may still be able to get a second mortgage by working closely with your mortgage broker. Your broker may be able to help you secure a second mortgage through a specialty lender who works specifically with loans meant to help those with bad credit.
And did you know that you can even use a second mortgage to help you improve your credit? A second mortgage can be a great tool to consolidate your existing high-interest debt. And as you make your regular payments on your second mortgage, not only will you be paying off your debts faster, but you’ll also be improving your own credit score.
While it is true that you might be able to go to your bank and get a second mortgage, there are more advantages to working with a mortgage broker to get your second mortgage. These advantages include:
If you think that a second mortgage may be right for you, or if you would like to discuss this option further, I would be happy to help. Contact me today to set up an appointment.