Second Home Mortgage: All You Need to Know About in 2021

 

 

Becoming a homeowner is an aspiration of every human being. Even people who are already homeowners are looking to purchase a second home and buying a second home can be a smart move.

 

According to a report published in Business Insider, there are more than 1.91 million Canadians with Home Equity Line of Credit (HELOC) and even more with second home mortgages. This number has increased from the last couple of years.

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What is a Second Home Mortgage ?

Second home mortgage is a type of loan secured by your existing home and is similar to the previous mortgage provided by the bank. With passage of time, the equity gets built up on your home and with a second home mortgage you can use this equity (using your home as collateral).  You are basically adding a second loan on your existing mortgage. By smartly leveraging this mortgage product you can save a lot of money and get access to cash or credit when needed.

Requirements of Second Home Mortgages

To get a Second home mortgage in Canada, there are some financial requirements that you need to qualify for. However, it is best to consult a mortgage broker as these requirements may vary from province to province and also depends on the lender you choose to work with. Here are the overall requirements of to get second home mortgage:- 

  • The borrower should have a credit score of 620 or higher.
  • The DTI (Debt to income ratio) should be lower than 43 percent. 
  • The Home equity should be between 15 – 20 percent. 
  • Good history of on time payments of previous mortgage. 
  • Strong and stable income history. 

If you have a bad credit score then you must fulfill these requirements otherwise you don’t qualify for second mortgages. So before applying for a second mortgage, it’s better to boost your credit score as this increases the chance of approval. You can take advice from  a mortgage specialist about how to increase your credit score.

Types Second Home Mortgages

There are basically two types of second mortgages – a home equity line of credit and home equity loan.   

1. Home Equity Loan

As the name suggests, it is a type of mortgage in which you get a lump sum payment on the equity. Your mortgage broker or any lending institute will give you a percentage of home equity in the form of cash. In exchange you pay the principal and interest on loan in monthly installments within the specified period just like traditional mortgage. Most of these types of mortgages have a timeline of 5-30 years of repayment.   

2. Home  Equity Line of Credit 

In this type of second home mortgage the lender approves you a line of credit based on your home equity. Think of this type of mortgage as a credit card. If you have 15,000$ as credit on HELOC, you spend 5000$ and pay back. Now you have a full 15,000$ for the future.  HELOCs are valid for a particular time frame called the “draw period”. As you do with a credit card you must make monthly payments during the draw period and once this period ends you have to repay the entire amount. You can either pay the amount in lump-sum or in monthly installments – this depends solely on your lender. If you failed to make payments then the lender may seize your property. 

Second Home Mortgage Rates

As second home mortgages are more riskier for lenders than primary mortgages so they have more interest rate than first mortgages. 

Having said this, a second option is a better option than other alternatives. The interest rate of a second mortgage is less than interest rates charged on credit cards. That’s why many people use home equity loans or home equity line of credit to pay their credit card debt or student loans. Getting a second mortgage if you have a bad credit score means you have to pay higher interest rates. 

 

This mortgage product is different from refinancing a mortgage because it adds monthly payments without changing terms and conditions of the mortgage. 

Advantages and Disadvantages of Second Home Mortgage

Unlike any other type of loans, second home mortgages have various advantages and disadvantages. You are using your home as collateral to get access to cash or credit which can be used to pay other financial burdens. At the same time if you fail to make payments then there is a risk of losing your home to the bank.

Advantages of Second Home  Mortgage 

  • A second home mortgage helps in utilizing the untapped equity of your home. 
  • Helps in paying financial debts like credit card, student loan or can be used for renovation of your property. There are no predefined rules which state that you have to use the money from a second mortgage in a particular way. You can use this money to plan a wedding or purchase a vacation home. 
  • Interest rates are lower as compared to private loans or credit cards. Due to this reason they are considered as secured debt 
  • Higher loan amounts as some lenders can agree to lend nearly 90 percent your home equity. This means you can borrow more money with this mortgage than any other type of loan. 

Disadvantages of Second Home Mortgage

  • Higher interest rate as compared to refinancing. 
  • The second home mortgage adds monthly installments so this might add financial burden in your monthly budget if you are living from paycheck to paycheck. Now you are paying two payments one on primary and other on secondary mortgage. 
  • If you are not able to make payments then your house is at risk. 
  • Closing on a second mortgage will cost you money. 
  • If the appraisal of your house is not high enough then you don’t have much equity which does not qualify you for this type of mortgage. 
  • To take a second home mortgage you have to pay for its cost including appraisal fees, origination fees, closing costs and costs to run a credit check.

Summary

Second home mortgages are the best financing option if you use them smartly. One strategy that homeowners usually implement is using a second mortgage for purchasing rental property and this ensures a monthly cash flow which covers the monthly installments of the second mortgage. Paying college fees and credit card debt is also another option available. 


You don’t have to take a second mortgage from an existing mortgage lender. You can get quotes from multiple lenders and they choose the best one but if you have good credit history then chances of  getting approval on this mortgage from the existing lender is very high.