Second Mortgages 101: Frequently Asked Questions

There is a lot of confusion circling the topic of second mortgages in Toronto. To demystify the process and help you make the right choices for your financial future, we’ve created this FAQ. Continue reading to have your important questions about second mortgages answered.

What is a Second Mortgage?

A second mortgage is a loan taken out against the equity of a property that currently holds a mortgage. When a homeowner has accumulated a certain amount of equity, they will be able to borrow it from their lender.

Are There Different Types of Second Mortgages?

Yes. There are two types of second mortgages, which come with their own upsides and disadvantages:

  1. Home equity lines of credit, or HELOC. This gives the borrower access to a line of credit that they can withdraw from at their leisure.
  2. Lump-sum loans. These loans are a single payment from your home’s equity that must be repaid via monthly installments.

Why Do People Take Out Second Mortgages?

People take second mortgages out on their homes for all kinds of reasons. One of the most common reasons, however, is to consolidate debt. For instance, let’s say that you have a lot of high-interest credit card debt. You can repay the credit card debt with your second mortgage loan. Second mortgages typically have substantially lower interest rates than credit card debt, making them easier to pay off in many cases.

Realistically, you can take out a second mortgage to accomplish nearly anything. The best investments of a second mortgage are ones that will help provide you a better future, such as paying for higher education tuition or making important renovations around your home.

How Much Can I Borrow?

This depends entirely on how much equity your property has accrued. You will not be able to take out 100% of this equity, but pretty close – typically 80% to 85%.

What Happens if I am Unable to Pay?

Your home becomes collateral when you take out a mortgage in the first place, and the same is true of a second mortgage. If you are unable to make your monthly payments on time, you risk foreclosure on the property.

Will I Have to Pay Any Fees to Get a Second Mortgage?

Which fees you have to pay, as well as the amount of these fees, depends on the lender. Each lender has different policies regarding this matter, so it’s important that you get the information from your lender themselves. This way, you won’t get any unpleasant surprises when you want to use your home’s equity.

The best thing that you can do when considering a second mortgage is to speak with your lender directly. You may choose to get a second mortgage through your existing lender or through a new institution. Make sure to shop around for interest rates, just as you did when you took out the first mortgage!

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