When you buy a home and let’s say you put 20% down and borrow 80% mortgage. That mortgage is called a first mortgage as it is in the first position on the title of your property. If later you borrow more money secured by your house without paying-off the first mortgage, that mortgage is called a second mortgage as it’s charge shows up after the first mortgage on the title of your property.
So, the Second mortgage in Canada is when a homeowner already has a first mortgage and wants to borrow more money, in addition and on top of the existing first mortgage, using the equity in his home.
How Much Second Mortgage You Can Borrow
How much you can borrow in the form of a second mortgage on your home will depend on how much lendable equity you have in your home. Lendable equity is different from actual equity.
To find out how much equity you have in your home, you take the market value of your home and subtract the amount of the first mortgage. The balance left is your equity. For example, the value of your home is $1,000,000. You have a first mortgage of $600,000. $1,000,000 – $600,000 = $400,000. So, $400,000 is the equity you have in your home. However, you cannot borrow the whole $400K as that will be going to 100% of the market value. You can only use some of this equity to borrow additional money on your house in the form of a second mortgage.
How To figure out your Loan-To-Value (LTV) Ratio
The amount you can borrow on this $400K equity will depend on many factors and the type of lender you are borrowing the second mortgage from. Generally speaking, the max you can borrow on a second mortgage is 75% of the market value even though there are lenders who go up to 90% of the market value. This 75% of the market value is called loan-to-value (LTV) ratio.
If the value of the house is $1million and let’s say you want to borrow up to 75% LTV or of the market value, then this is how to calculate how much you can borrow. 75% of the $1 million is $750,000. Subtract the first mortgage of $600K from $750K and you get $150K. So, in this particular case, you can get a second mortgage or a home equity line of credit for $150K.
It is a quick and simple way to raise capital for debt consolidation, home renovation or any other purpose or emergencies.
Second Mortgage Interest Rate
To calculate the rate of the second mortgage in Canada, Benevolent Bancorp Funding looks at the equity of your home. The rate will depend on the lender and on what LTV you are looking to borrow.
The home equity mortgage rate with a bank is way lower than the rate from a private lender. But you have to have excellent credit and good verifiable income in order to qualify for a home equity loan from a bank.
On the other hand, the rate for a private mortgage does not depend on your credit or income. The rate for a private second mortgage from a private mortgage lender is strictly based on how much equity you have in your home and the type and the location of the property. The rates for private mortgages are almost totally based on the LTV. The lesser the loan to value ratio (LTV), the lower the rate.
How Does One Build Up Equity
The equity of your home might increase or decrease temporarily but in the long run, it will increase because of real estate appreciation.
Besides real estate appreciation, the equity of your home can increase in multiple ways. Here are some ways that it can grow:
If you are paying off your mortgage steadily every month, your equity will increase since you are reducing the balance on your mortgage in Vancouver.
If you make renovations/improvements that will increase the value of your home and your equity will go up.
Types of Second Mortgages in Canada
1 Year Fixed Term Second Mortgage
The average private second mortgage in Canada is for a one- year term. This mortgage provides you with the capital you need to do whatever it is that want to do; use the time to fix your credit or income situation or meet any financial emergency.
However, so long you have been paying your mortgage payments on time, the mortbgage can be renewed for another year and even longer. We try to keep your interest and your monthly payments as low as possible here at Benevolent Bancorp. We even have an option of no monthly payments for a year.