Our guide to second mortgages in Toronto
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Leveraging the equity in your home is one of the best ways to access large sums of money at manageable rates. According to Mortgage Professionals Canada, 770,000 homeowners took a second mortgage on their homes in 2020, 7.7% of all homeowners in the country. Before taking out a second mortgage, it is worth weighing up the pros and cons to make the best decision for your financial wellbeing.
Are you thinking about taking out a second mortgage in Toronto, Ontario? This comprehensive guide will tell you everything you need to know, from the basics of a second mortgage to the different rates available.
Use our comparison tool above to find the best second mortgage plans for you!
What is a second mortgage?
At its most basic, a second mortgage is a lump sum loan of up to 80% of the value of a property. This is secured against your home and means paying off two mortgages with regular installment payments.
Understanding second mortgages means exploring the fundamentals of home equity. This is what determines how much money you can liquidate from your property when you take a second mortgage on your home.
When you take out a first mortgage, each repayment changes the loan balance, with the amount you have paid off becoming equity. While it may seem complex, calculating your home equity is a simple process. Subtract how much you have already paid towards the loan from the total amount you borrowed.
For example, you took out a mortgage of $300,000 to purchase your home, and you have paid off $120,000 including the down payment. So, you have $120,000 in equity that you can borrow against for a second mortgage.
Good to know
Home Equity is equal to the value of the property - the remaining balance.
How to get a second mortgage in Toronto?
The process of getting a second mortgage in Ontario is relatively similar to getting your first mortgage. Here are the main steps you will need to take:
- Compare lenders and choose the right one for you.
- Prepare all the document you will need to apply (income, credit score, debt list, etc)
- Apply to the lender
- Submit to appraisal and inspections as necessary
Looking for a second mortgage in Toronto? We can help you find a great rate.
Compare second mortgage lenders and rates here!
How does a second mortgage work in Toronto?
In Toronto, Ontario, it's possible to secure a second mortgage on your property title. This special type of loan will have its own charges and won't affect any existing mortgages you may have with lenders elsewhere in Canada. The interest rates for these types typically tend towards higher than regular transactions but they do offer some extra protection should something go wrong later down the line - such as when there are delays during repayment because one borrower cannot work due to life circumstances like illness etc.
How to qualify for a second mortgage in Toronto?
In order to qualify for a second mortgage in Ontario, you will need to meet certain criteria. It is a similar process to any other type of loan. Lenders will evaluate your financial profile and decide if they will take a risk on giving you the loan. Lenders will likely have stricter requirements than those for your first mortgage, however, the process is generally smooth. In particular, lenders will assess:
| Credit Score | Equity | Income |
|---|---|---|
| You will need to have a good credit score to get a second mortgage in Toronto. A good credit score counts as, in general, 680 or more. However, there may be options available to you if you have a bad credit score. | Your home equity determines how much money you can get when you take out a second mortgage. Lenders prefer that you have at least 15%-20% equity in your home. Calculating your home equity is relatively easy. Subtract the amount that you’ve paid toward the principal balance of your home from the total amount you borrowed. | Lenders will look at your income to determine if you will be able to afford the payments in addition to the loan payments of your first mortgage. |
What are the best second mortgage rates in Toronto?
Our team has seen second mortgage rates as low as 3.99% for well-qualified borrowers, but nailing down a single interest rate depends on the lenders themselves and your income, equity, credit score and property value.
Second mortgage interest rates in Ontario are typically higher than on a primary mortgage, as it's an extra risk for lenders. However good financial standing may make negotiating with lenders easier. As a result, you may be offered at lower prices, therefore it is always important to do your research before committing to a second mortgage loan. Use our quick and easy tool to help you compare interest rates.
Compare second mortgage lenders and rates here!
What can I do with a second mortgage?
Unlike other types of loans, such as auto loans, you can use the money from a second mortgage for anything you would like. Borrowing against the equity of your home is one of the easiest ways to get a large loan. Getting a second mortgage can give you help to fund your life. Some examples of how you can use the money include:
- Home renovations
- Purchasing a new car
- Unexpected emergencies
- Pay off debts
- Access equity in the form of cash
- To pay off your child's tuition
- Wedding expenses
Pros and Cons of getting a second mortgage
There are many reasons to get a second mortgage. However, like any loan, there are pros and cons. Here are some advantages and disadvantages of taking out a second mortgage in Toronto:
Pros
- Improves credit score
- More flexible payment terms
- You can use the money in any way you would like
- Lower interest rates compared to other types of loans
Cons
- Risk of losing your home
- Possibility of being penalties if missed payments
- Interest rates are higher compared to first mortgage
- Additional cost
It is important to assess the positives and negatives of second mortgage lenders to ensure to get the right deal that meets all your needs. Our comparison tool is here to help you do just that! Click below to get a quick and easy quote today.
Compare second mortgage lenders and rates here!
Who are the best second mortgage lenders in Toronto?
There are many lenders that offer second mortgages in Ontario. Some examples include BMO, CIBC, TD, Scotiabank and RBC. Use our comparison tool to find the best lender in Toronto for you!
Mortgage brokers
A mortgage broker acts as the middle between you and a mortgage lender. They help you look at your financial standing and advise you on which lenders will be best. Mortgage brokers can save you time and money during your loan application and with the loan itself. However, there are cons to mortgage brokers such as:
- Brokers fees
- Not every lender works with mortgage brokers
- Mortgage brokers may not offer you a better deal that you could have found alone
Private lenders
Private mortgages are home equity loans, but they are different in the way that they are offered by private lenders and have less strict lending requirements. Private lenders may even allow you to borrow up to 95% of the value of your home. Private lenders may be an option for you if you have bad credit, for example. This is because private mortgage lenders typically have a less strict set of requirements to be approved. They are typically shorter and come with higher interest rates and fees than those offered by traditional mortgage lenders. Private mortgage lenders are meant to be a temporary measure before transitioning back to typical mortgage lenders.
What is the difference between a HELOC and a second mortgage?
A home equity line of credit (HELOC) and a second mortgage are both types of credit that use your home as collateral. So, which one is right for you? Here's a breakdown of the pros and cons of each to help you decide.
HELOC
A home equity line of credit (HELOC) is a popular alternative to a second mortgage. With a HELOC, you can withdraw the money when and as needed.
A HELOC is a revolving loan that allows you to borrow money at any time up to a certain credit limit. When you get a HELOC in addition to a separate mortgage, your HELOC is considered to be a second mortgage. You’ll be making two monthly or weekly payments: one for your mortgage, and one for your HELOC.
You do not have to get a HELOC with your current mortgage lender. You can get a HELOC with another bank or any lender, though it would mean that you would need to make payments to two separate lenders.
Second Mortgage
A second mortgage differs from a HELOC because you receive one lump sum of money. Whereas, with a HELOC, you can withdraw and use the money as you need it. Receiving a lump sum of money is not a bad alternative; however, a HELOC may save you money on interest. With a line of credit, you only pay interest on the money you actually use. With a second mortgage, you pay interest on the whole amount.
