Is a Second Mortgage Right For You?

Due to the unprecedented flurry in the housing market over the last year and a half, many are shaking their heads in astonishment. With appreciation numbers rarely seen in such a short period, it also may be tempting for existing homeowners to stand back and take a look at the degree of equity that has been earned over the same time period and wonder if this newfound equity could be used for immediate and maybe long overdue financial goals.

This holds especially for those homeowners fortunate enough to be owning property in the Toronto area and surrounding GTA. With property gains in the double-digit territory and housing sales upwards of 80% higher than the same time in 2020, Toronto homeowners have found themselves in a very enviable position. Toronto, Vancouver, and the Hamilton area have witnessed unparalleled growth and now represent currently some of the hottest property markets in North America.

With the average price of a single detached dwelling in Toronto now at $1.1 million and an appreciation of nearly 2% in the last month alone, it may just be time to make your house work to your advantage. After all, you work hard to ensure your monthly mortgage payment is made, so tapping into existing equity may be an economically prudent decision to make.

What are Some of the Most Common Second Mortgage Options?

Options for second mortgages utilizing built-up equity are varied and come down to what financial priorities you may have. Regardless of what second mortgage option a homeowner may ultimately decide upon, lenders will be looking to a few key criteria to base second mortgage financing approval on:

• The Loan-To-Value (LTV) of the Subject Property - Lenders will be assessing LTV to determine the amount of equity that can be leveraged for a second mortgage. A bank’s maximum loan-to-value is 80% of the appraised property value, the lower this percentage, the better it is from a banks perspective.

• A recent appraisal of your property - A lender will be determining the equity available to you by using an appraised value of your home. An appraisal is required no matter which type of lender is used; prime banks, alternative banks or private lenders.

• The degree of the existing equity in your property- When lenders are qualifying for a second mortgage loan financing they will be looking at the overall level of equity established compared to the amount still owing on your primary mortgage. The method of calculating LTV is the current mortgage balance divided by property value. To get the dollar amount of what you have available is to take 80% of the value on your property minus the current mortgage balance.

A Brief Rundown on Second Mortgage Types

Whether it is the bank, credit union/trust company, or even a private lender ( referred to in the industry as a C lender), it is important to have a clear financial picture in your mind as to what type of second mortgage loan would be applicable. It is also advisable to be prepared when connecting to discuss your request for a second mortgage; knowing your current mortgage balance, estimated value of your home, credit score, your credit history etc.. Yes, dealing with a mortgage agent that knows what they are doing, she/he will be able to ask the right questions within the first 15 minutes of your conversation and be able to give you an idea of where things stand for you.

It is also important to be aware of the different second mortgage loan options. Here is a brief list of a few key forms of second mortgage financing:

• Home Equity Loans

• Home Equity Lines of Credit (HELOC)

• Home Renovation Loans

• Debt Consolidation Loans

• A second mortgage to help with primary mortgage payments

These 2nd mortgages can be through a prime bank, or an alternative bank or a private lender. Each one of these types of lenders come with qualifying guidelines (although with a private mortgage, there is no qualifying per se), but the bottom line is to know the details of what is available to you.

Take the time to sit down and determine if you will be utilizing newly acquired equity in your home and for what purpose it will be used for.

For details on how you can access your home equity, I am more than happy to help steer you in the right direction by providing the details you need to make a sound decision. Make your home work for your financial goals.