What Is a Second
Mortgage?

Quite simply, a second mortgage is another, smaller mortgage from the original, first mortgage. A second mortgage may be used for a variety of reasons, such as purchasing a new house or a vacation property, or for providing a place for children or aging parents to live.

GLM Mortgage Group provides second mortgage services including many options that will fit your financial means. Our team specializes in assisting individuals who own multiple properties.

To borrow money for a second mortgage, you’re required to have equity in your home. Home equity is the value of your home, minus any money owed against it. For example, if your home is worth $200,000 with a $130,000 mortgage, then your home equity is $70,000. Additional factors include:

• Second mortgage closing costs can range up to 10% of the amount you borrow, depending on the lender
• You can use a second mortgage for debt consolidation or for major purchases
• Your credit score and loan to value ratio affects second mortgage interest rates – a higher credit score will result in lower mortgage interest rates, while a lower score means higher mortgage interest rates
• Second mortgage interest rates are higher than first mortgage interest rates – but are still lower than most credit card interest rates
• Second mortgage terms can be from 1 to 30 years, depending on the second mortgage lender and can be interest only payments
• The second mortgage is secured by your existing home

A second mortgage is ideal only when you’re sure there is no other option for refinancing. If you can’t pay your first mortgage, look into refinancing options instead. With refinancing, you retain equity in your property, and you may get the loan at a better rate.

Be Prepared to Pay Higher Interest Rates

Look at the terms of a second mortgage carefully. The interest rate may be quite high, given that the lender issuing the second mortgage does not have any claim on your original mortgage in the event of a foreclosure, and the risk is therefore higher. It’s also important to know that even if you continue payments on your first mortgage, but default on your second mortgage, you could still end up losing your home. Second mortgage lenders can buy out the primary mortgage and then foreclose to recover their money.

Be Aware of Fees

Fees and charges for a second mortgage can be quite substantial. There’s extensive paperwork required, and the second mortgagor will need a new appraisal of your property to estimate its value and equity. Application costs, appraisal fees, legal fees, etc. can add up to a significant amount.

Timing is also important. The amount of the loan depends on how much equity you have in your home, which, in turn, depends on how the value of your home has changed since you obtained your first mortgage. If the housing market is down, wait, if possible, for prices to pick up. As with any loan, interest rates play a very important role in second mortgages. If interest rates are low, especially if you can lock in a fixed rate, it’s a good time to take out a second mortgage.

Home Equity Limitations

A second mortgage can only equate up to 95% for a purchase of the value of your home but, in most it will be 80%. When you deduct the balance of the first mortgage, it leaves you with your borrowing amount. Here’s an example: If your home is worth $100,000, you can borrow up to a maximum of 80% of its value. This would leave you with $85,000. If your first mortgage is $40,000, then you can borrow $45,000 for a second mortgage ($85,000 – $40,000). Remember that there will also be closing costs and, if you need to borrow in order to pay them, they’ll be deducted from the money advanced to you on closing.

Insurance Rates

If your intention is to acquire financing for a second property above 80% of the purchase price, it’s mandatory that you apply to CMHC, Genworth Canada or Canada Guaranty for mortgage insurance. In most instances, lenders are looking for mortgage applicants to make significant down payments in the area of 25% in order to be eligible for the remaining financing.

Payments

Payments for second mortgages are arranged before the time of closing. In most cases, direct withdrawal from your current banking institution is used. If you wish to know the amount of your second mortgage payments, we recommend using a mortgage calculator.

How to Qualify For a Second Mortgage

With your financing secured you can start to look for new home developments or plan your rebuild.
Here are some helpful tips to keep in mind as you begin:

To qualify for a second mortgage, you must have more than 20% equity in your home and be able to pay for the mortgage without exceeding your Total Debt Service Ratio (TDS). You can qualify if you have a damaged credit score, but you’ll pay a higher rate of interest than qualified borrowers.

Credit Score

Your credit score demonstrates how likely you are to fulfill your financial obligations. You can qualify for a second mortgage if you have a damaged credit score, but you’ll pay a higher interest rate than qualified borrowers.

Employment

The longer you have worked with one employer, the more secure your job is in the eyes of a lender. At a minimum, you must be off your probationary period and have a previous employment history of six consecutive months or more.

Required Documents

Before securing a second mortgage, basic documents will be required such as your Social Insurance Number (SIN), proof-of-employment letter, first-mortgage documents and bank statements. Visit our Mortgage Documents section for a list of documents that may be required by the lender.

Closing Costs

Closing costs can run up to 10% of your second mortgage. These include, but are not limited to:

• Appraisal fee
• Legal fees
• Title search
• Title insurance
• Home survey

Debt Consolidation Using Second Mortgage

If debt is weighing you down and a reduction in your monthly payments would increase your cash flow, consider consolidating your debt through a second mortgage. By consolidating your debt, your monthly payments can decrease by as much as 50% due to lower interest rates and longer repayment schedules. Find out how to increase your monthly cash flow by contacting us today.