A second mortgage is a financial tool that allows someone to borrow against the equity they’ve built up. These can be used to fund projects that will increase the value of a home, such as a renovation. However, because the lender is taking on more risk, the interest rates for second mortgages are usually higher.
A few factors to consider include heightened foreclosure or power of sale risk, the fees for taking out a second mortgage, and the fact that a homeowner is increasing their debt load.
Second mortgages in Ontario are a pathway to using a property's equity for significant expenses but must be considered from all angles. The best place to start is to understand the qualifications.
Exploring Eligibility Criteria for Second Mortgages in Ontario
Second mortgages are also an excellent tool to consolidate bills or buy a second property. If you're looking to get one of these loans from a traditional institution like a bank or credit union, the eligibility requirements include:
- More than 25% of the equity that you have built up. Remember that equity is the portion of your property that equals the current value and subtracts any outstanding mortgage balances.
- The a is another factor used by A&B tier lenders. This is how much you pay out to your debts versus your gross monthly income. Most lenders will look for one that's below 43%. Here's a formula to calculate your numbers.
- The credit score is vital in any conventional A&B tier second mortgage. Equifax has compiled an excellent infographic highlighting the top factors affecting your credit scores.
Private lenders use equity when you're applying for a second mortgage. They filter it through The Loan to Value (LTV) ratio formula to decide on approvals. This ratio between the requested mortgage and property value requires a home appraisal.
If you have low income or bad credit and cannot get accepted through a traditional bank, private lenders factor in the equity you have in your home to increase your chances of a positive result. They usually require more than 25% equity.
Of course, other factors, including Ontario's market trends, come into play.
The Impact of Ontario's Housing Market Trends on Second Mortgage Rates
There’s a dynamic relationship between market trends and second mortgage rates. There's some good news from The Canadian Real Estate Association (CREA), which has recently updated its forecasts for 2024.
The report shows that interest rates have been the major factor influencing housing markets over the last few years. They expect the Bank of Canada to begin cutting rates in 2024, although a firm date has yet to be given. However, they do predict the national average for home prices will climb 2.3% to $694,173 in 2024. CREA also reports that Ontario is expected to see a rebound from low sales volumes.
Higher sales volumes typically mean a higher demand that can drive up property values as far as the second mortgage goes. The higher the property value, the better the loan-to-value ratio for applicants for a second mortgage.
That could lead to better second mortgage rates as the risk to lenders decreases.
Legal Considerations and Property Laws Specific to Ontario
Private lenders usually require second mortgages with an LTV that does not go over 75%. They also typically want to see at least 25% of equity in any property. Applicants need to remember these get leveraged against a property with an existing mortgage loan.
Second mortgages are paid off after the primary or first mortgage balance is done. People take these second mortgages out for various reasons, including consolidating debts, benefiting from lower interest rates, and covering renovation costs.
Second mortgages involve appraisal fees and legal fees, as well as other possible closing costs. These are considered short-term loans, usually at most five years.
Case studies: Successful second mortgage acquisitions in Ontario
Mary Brown (a pseudonym) contacted us at Mortgagebrokerstore.com asking for a second mortgage to pay off some bills and credit cards. Due to their credit and employment situation, the bank refused to lend them any additional money.
They aimed to pay off their highest-interest loans and urgent bills with lower-interest mortgage financing. During the initial call, our team collected essential info and outlined the expected interest rates and fees for the type of financing Mary was looking for.
Mary and her partner filled out a mortgage application and provided the full details to our team. They owned a property in Bowmanville worth an estimated $860,000. She had an existing mortgage with a central bank for $455,000. Her second mortgage request was for $80,000. This put her expected loan-to-value ratio at 65%, including fees and closing costs.
A MIC lender named RiverRock approved the mortgage request, and a quote was provided to clients. RiverRock was selected because it is the best in pricing and customer service. All details in the application were verified via credit reports/appraisals/lawyer review, and the money was provided in 2 weeks.
This successful transaction relieved our clients from their debts and allowed them to continue using their credit cards on an emergency basis. Their long-term goal is to improve their credit and employment situation and get a cheaper bank loan when ready.
Are You Looking for A Second Mortgage?
Mortgage Broker Store focuses on private mortgage-related products, including second mortgages. Mortgage applications that don’t meet traditional lending requirements are a specialty.
Our team of private lenders, brokers, and licensed mortgage agents is ready to help. Let us help you get a mortgage loan that fits your requirements today.
Email ron@mortgagebrokerstore.com or call 416-499-2122.