If you own a home in Canada then you have probably have heard of a second mortgage at some point in your life. A second mortgage is similar to a first mortgage, in that it is a loan secured by your property. As time passes you will accumulate more and more equity on your property. A second mortgage is primarily intended to use the equity that you’ve accumulated over the years.
According to a report by Business Insider, almost 2 million Canadians have a second mortgage, and nearly as many that have a HELOC. Some Canadians will use their second mortgage in order to avoid having to declare bankruptcy. In any event, a HELOC, for those unaware, is also another form of a second mortgage, because it serves as a line of credit for home equity. In other words, the person will supplement a second loan over their first in order to access their equity. Below are some things that you should know before going for a second mortgage in Toronto.
Different Types of Second Mortgages
A revolving HELOC works similarly to a credit card. That is, the borrower will have access to equity in perpetuity as they continue to pay off the principal (what they owed previously) over the upcoming months and years. Moreover, a HELOC can be modified to become a closed second mortgage, which functions much like a loan for a vehicle. That is, the borrower will receive only one lump sum of money from their equity and they must pay it off in a gradual manner.
It should also be noted that it is difficult to qualify for a HELOC of any kind, because they tend to only be offered to those with an impeccable credit profile and who happen to live in a prosperous urban area. Hence, those who have a poor credit profile or have a meager income will only likely have one option at their disposal—a private mortgage.
The Two Main Reasons Why Second Mortgages are Used
The most popular reason why a second mortgage is used is to pay off a consumer debt that has high interest. Many homeowners will also use a second mortgage in order to upgrade their home for resale or to renovate it for their own recreational purposes. Leveraging a second mortgage is highly recommended at the moment because credit card interest rates are presently 15%. As such, you can save a large sum of money by opting for a second mortgage.
For instance, let us imagine that you owe $30,000 on your credit card. In such a scenario you would have to pay roughly $600 in minimum payments every month; This is of course assuming that a 3% minimum payment is required. Now, if your interest rate was 15% APR then you would owe $4,500 in interest charges after just one year has elapsed. This is before you even get to the principal amount that is owed. As can be seen, interest charges can make or break first time homeowners who aren’t too careful with their fiancees.
Due to the aforementioned problems, many Canadians turn to a second mortgage in order to pay off their credit card debts. The end result is that their interest rates will be reduced because their second mortgage is secured by their home, which serves as the primary asset in this case.
Remember that Your Home Will Be Used as Collateral
If you have decided to take out a second mortgage on your home you must remember that your home will actually be used as collateral to secure the loan. As a result, if you fail to pay it off then the lender can foreclose on your property the same way they could with your first mortgage. However, the tradeoff is in the significantly lower interest rates that you will be charged, as your home will serve as an asset that will back your loan.
Take Advantage of Interest Only Payments
It is possible to only make interest payments with many of the second mortgage products that various lenders offer their clients; this will allow you to have easier and more affordable access to your home before you opt to sell your house to the highest bidder. Your monthly payments will also be significantly lower.
To further illustrate, if you were interested in renovating your home before resale or are interested in renegotiating your first mortgage, then you could remodel your home using the funds procured from the second mortgage. You could also have the option to pay off the interest charges. Then after you are done giving your home a makeover you could then resell it at a higher price and then use some of the money that you’ve made to pay off your second mortgage.
Avoid Private Mortgage Insurance
When a person applies for a standard mortgage in Canada they need to acquire private mortgage insurance if they are unable to put a minimum 20% down payment on their house. The end result is that they will have to pay fees, known as Canadian Mortgage and Housing Corporation fees, which can actually be quite exorbitant.
For instance, if you were to take out a half a million dollar mortgage with a 5% down payment then you would have to pay 4% worth of Canadian Mortgage and Housing Corporation fees. In other words, you would need to pay almost $20,000 in fees because you weren’t able to make the minimum 20% down payment.
The good news is you can take out a second mortgage in order to avoid private mortgage insurance. Of course this also means that you will have to add additional expenses to your monthly budget but it can still be a more affordable alternative to having to pay private mortgage insurance fees.