How to Get a Second Loan on a Mortgage?

If you are Canadian homeowner and want to get a second loan on your mortgage, then it is possible by taking out equity from your property. Second loan on a mortgage commonly known as Second Mortgage is used by homeowners to fulfill various financial needs such as home improvement, investment, consolidating debt and many more. Let’s understand how to get this loan, how it works and how you can calculate it.

Understand Second Mortgage Loan and How it works?

A second mortgage is an additional loan taken out on a property that already has a primary mortgage. Like the first mortgage loan, a second mortgage is secured by the property itself and used your home as collateral.

It allows homeowners to borrow against the equity they have built up in their home. Equity on a home is the difference between the value of the property based on the current market and the outstanding balance on a mortgage secured against it.

How Equity is Calculated:

Home Equity = Current Market Value of the Home−Outstanding Mortgage Balance

Example:

• If your home is currently valued at $500,000 and you still owe $200,000 on your mortgage, your equity would be:
• Equity=$500,000−$200,000=$300,000

Second Mortgage comes in two main forms:

Home Equity Loan: This is a lump sum loan that usually comes with both fixed and variable interest rates. The lender disburses the approved loan amount directly to the borrower, usually by check or direct deposit. The repayment terms of home equity loans are usually fixed monthly payments over the loan term, which can range from 5 to 30 years.

Home Equity Line of Credit (HELOC): HELOC is another way for homeowner to access second loan on their mortgage. This is a revolving line of credit that works similarly to a credit card. You can borrow up to a certain limit, repay it, and borrow again. HELOCs usually have variable interest rates.

Step by Step Process to Get Second Mortgage Loan Approved

Here are the steps to obtaining a second mortgage:

Assess Your Equity: Calculate how much equity you have in your home. You’ll generally need to have at least 20% equity to qualify for a second mortgage. You can calculate the loan amount by using Home Equity Loan calculator by Homeequityloans.ca.

Review Your Credit Score: Lenders will check your credit score and history to assess your eligibility. A higher credit score can help you secure a better interest rate.

Calculate the Loan-to-Value (LTV) Ratio: This ratio compares the amount of the loan you want to the value of your home. Most lenders require an LTV ratio of 80% or lower, combining both your first and second mortgages.

Shop Around for Lenders: Different lenders offer different rates and terms. It’s essential to compare offers from various second mortgage lenders to find the best deal. Having a mortgage broker can leverage you to secure a better deal who can find a lender based on your unique requirements.

Submit Your Application: Once you’ve chosen a lender, you’ll need to fill out an application and provide documentation such as proof of income, credit reports, and details of your existing mortgage.

Get an Appraisal: The lender will likely require a home appraisal to determine the current value of your home and the amount of equity you have.

Close the Loan: If approved, you’ll close the loan, sign the necessary paperwork, and receive the funds either by check or direct bank deposit.

Second Mortgage Calculator: How to Calculate your loan?

To determine how much you can borrow on your second home loan, you can use a second mortgage calculator. The general formula is:

Maximum Loan Amount= (Home Value × Maximum LTV Ratio) −Existing Mortgage Balance

• Home Value: The current market value of your home.
• Maximum LTV Ratio: The maximum loan-to-value ratio allowed by the lender. This is typically 80%.
• Existing Mortgage Balance: The outstanding balance on your primary mortgage.

Example Calculation:

Let’s say your home is valued at $500,000, your lender allows a maximum LTV ratio of 80%, and you still owe $300,000 on your primary mortgage.

Maximum Loan Amount= ($500,000×0.80) −$300,000

$400,000 − $300,000 = $100,000

In this example, you could potentially borrow up to $100,000 as a second loan on your mortgage.

From Where to Get Your Second Mortgage?

You can obtain a second mortgage from a variety of financial institutions and lenders, including:

Traditional Banks (A-lenders): Canada’s Big Five Banks like RBC, TD Canada Trust, BMO, Scotiabank, and CIBC offer second mortgages. They often provide a range of options and competitive rates. However, they have strict lending criteria for individual to pass through.

Credit Unions: Credit union lenders are financial institutions owned and operated by their members, offering a range of banking and lending services. They are known for their member-focused approach, often providing competitive rates and personalized service.

Mortgage Brokers: Using a mortgage broker for a second mortgage can offer several advantages, especially if you’re looking to navigate the complexities of securing additional financing. They have access to a broad network of lenders, including banks, credit unions and private lenders. This means they can offer a range of loan products and terms that you might not find on your own.

Mortgage brokers like Homeequityloans.ca, Turnedaway.ca, and Mortgagebrokersnetwork.ca can help you to secure exclusive products and the best rates that fits your specific financial needs.

Private Lenders: In Canada, Private lenders are individual companies or investment groups offer second mortgages, particularly for borrowers who may not qualify through traditional lenders. Their lending criteria is so flexible that even the borrower with a bruised credit or low income can qualify for second mortgage.

Online Lenders: Many online lenders provide second mortgages with streamlined application processes and competitive rates. These platforms may offer quick approvals and disbursement of funds.

Unlock Your Home’s Value

When considering a second mortgage, it’s important to compare rates, terms, and fees from multiple lenders to ensure you get the best offer. Hiring a mortgage broker can give you peace of mind and surety of getting a lender to meet your specific needs, who can provide you with the best interest rate on your second home loan.

HomeEquityLoans.ca offers expert advice to help you understand the ins and outs of second mortgages. We present clear, unbiased information about loan terms, fees, and potential costs. Our team will make sure that you fully understand the implications of taking out a second mortgage before making any commitments.