With inflation sky-high, you might be considering leveraging the equity in your Victoria BC home to finance an important project or meet a big expense. A second mortgage uses your home as collateral for an additional loan on the property. There are pros and cons to this, which we will discuss below, but first let’s go into the details of what a second mortgage is and how it works.
A second mortgage allows you to borrow money against the equity in your home, resulting in two mortgages on the same property. This money can be in the form of a lump sum, in which case the mortgage is called a Home Equity Loan, or a line of credit, called HELOC (Home Equity Line of Credit).
One of the prime benefits of a second mortgage is that it allows you to access the equity in your home without breaking the first mortgage, as would be the case if you refinance your mortgage. This is especially advantageous if your first mortgage has a good interest rate or if there would be a penalty to break the mortgage. And let’s face it, in 2023, with interest rates as high as they are, your current mortgage probably has a much better rate than what you could get now.
Borrowing on the equity of your home makes sense in quite a few situations. Sometimes a second mortgage is used strategically, and sometimes the unexpected just happens, and it is nice that there is an option to get the funds to deal with it. The most common reasons Canadians take out a second mortgage include:
A second mortgage allows you to borrow up to 80% of the value of your home, however, you need to subtract your current first mortgage from that, which then leaves the available accessible equity. For example, let’s say your Victoria BC home is worth 1 million dollars, you could borrow up to $800,000 against it, but you’ve got a first mortgage of $400,000 of the mortgage, so that means you could borrow up to $400,000 in a best-case scenario.
Of course, there are other criteria that come into play such as: your credit score (the higher the better – at least 600), the amount of equity in your home, your income and the appraised value of the property. All these factors will determine the interest rate of the loan as well as the type of second mortgage you can obtain. In any case, the rates for second mortgages are generally higher than for first mortgages.
The process of getting a second mortgage is more or less the same as for a first mortgage: You submit an application to a lender and provide documentation detailing your income, debts and assets. The process is usually quicker and smoother than for a first mortgage.
Getting a second mortgage is still possible even if you have bad credit (Under 600). You may need to pay higher interest rates however or receive a lower percentage on your equity or possibly pay higher fees. A lender will consider the reason for your low credit score; but the good news is that many lenders are willing to work with the borrower’s unique situation these days.
The two common types of second mortgages serve different purposes and have different qualifying requirements. It is easier to qualify for a Home Equity Loan, but the cost is usually more.
Second mortgages can make good financial sense in some situations, however, they do come with some drawbacks.
In some situations, a second mortgage makes good financial sense. When you use the equity in your home to increase its value through renovations, remodeling or expansion, you are increasing your equity or ownership stake in the property.
Replacing expensive debt, such a credit card debt, with cheaper second mortgage debt is another good reason to consider a second mortgage. Or you may simply need to deal with an unexpected personal, medical and or family emergency.
However, you’d be wise to weigh the benefits of a second mortgage against the risk of losing your home should and if you default. Always remember, using your home as an ATM machine is never a good idea.