Owning a home in a country like Canada is literally an achievement in itself. It is an undeniable fact that managing the purchasing expenses for a home, finalizing the location and getting the loans approved can be a bit difficult, but the eventual ownership of that home makes up for every hard effort made. Mortgage loans are the greatest helping hands while buying a home in Canada, without even taking stressful financial burdens. You might have heard about the first mortgage loan or a primary mortgage loan while buying a new home in Canada, but do you know that you can apply for a second mortgage loan on the same property, before even completely paying off your first mortgage loan?

Yes, you can opt for a second mortgage loan on the same home, while paying off your first mortgage loan, to deal with your unpredicted expenses. Want to apply for this second mortgage loan? Stay wise enough to know about its conditions, interest rates, working, and risks. Read below to update your knowledge about this loan and then decide for yourself.
What is a second mortgage loan?

Life often brings unpredicted expenses that can be difficult to manage on your own. For such situations, you can opt for a second mortgage loan on your home. No matter if you have already taken a first mortgage loan on your home, second mortgage loan can still be applied on the same property. This second mortgage loan will be based on the equity value of your home. Depending upon the home equity value of your property, the amount for second mortgage loan can be finalized.

When can you apply for a second mortgage loan?

Before you plan to contact your lender or broker, know about the situations when it will be wiser to opt for a second mortgage loan. Second mortgage loans are beneficial in the following situations-

• When you need to arrange money for your child’s tuition fees or other educational expenses.

• When you need money for emergency medical expenses.

• When you are planning for an investment

• When you need to clear your high-consumer debts, or

• When you plan to renovate your home, etc.

It might be very fascinating to know that you can arrange money for your requirements through this second mortgage loan but it is also important to know about its working.

How does a second mortgage work?

A second mortgage loan has a specific working pattern that makes it different from the first or primary mortgage loan. The overall working of a second mortgage loan can be understood with the help of following factors-

• Based upon the home equity value– The net amount of your second mortgage loan will be calculated with the help of your home equity value. The home equity value can be determined by subtracting the pending balance of your first mortgage loan from the net worth of your home. You can apply for a maximum of 80% home equity value in your second mortgage loan, as there should be some equity value left (usually 20%) for your home.

• Second priority– In case you fail to manage paying off for both the loans, your first mortgage loan will be given the first priority while repaying. You might lose your home and your first mortgage lender will get the repayment at the first priority. Once the first mortgage lender receives back his payment completely, then only the second mortgage lender will start getting back his payment.

• Higher interest rates– As the second mortgage lender is taking a higher risk, so he will be charging higher interest rates for the loan. In case of repayment failure, the second mortgage lender will get a second priority for his payment, so the interest rates are higher for him.

• Credit score– Second mortgage loans are given on the basis of your credit score. For a second mortgage loan, your lender will require you to have a credit score more than 620. A credit score agency will assess your financial state and calculate your credit score for your lender. And, if you have a bad credit score or pending debts, then also you can apply for a second mortgage loan, but with higher interest rates.

Little known facts about second mortgage loans

Canadian homeowners might have heard about second mortgage loans that can be taken on the home equity value of their properties, but still the original idea of these loans might not be clear in their minds. This creates confusions and lack of knowledge among them, about financing options. Some little known facts about second mortgage loans are-

• Second mortgage loans are of two types– A home equity line of credit (HELOC) is also like a second mortgage loan that allows you to opt for a second loan on the same property, while paying off your first mortgage loan. But it is only offered in urban areas and to those having a good credit score. However, you can apply for a second mortgage loan with higher interest rates, in case you have pending debts and a bad credit score.

• Allowed interest-only payments– The second mortgage loans give you the power to make interest-only payments. This means that you need to make the payments based on the interest only, till you decide to renovate or sale your home. Once the renovations are done and you find a new owner for your home, then you can pay the second mortgage amount.

• You can avoid PMI with second mortgage loans– When you fail to arrange for the 20% of the net worth of your home or your down payment, then you need to apply for private mortgage insurance (PMI), which is also known as the CMHC (Canadian Mortgage and Housing Corporation) fees. Second mortgage loans are comparatively cheaper options and can be used to avoid PMI.

• Second mortgage loans can help in case of a bad credit score– You might think that getting a second mortgage loan with a bad credit score and pending debts would be impossible. But that is not the reality. With some lenders, it is possible to get a second mortgage loan approved by using your home as a collateral, even if you have a bad credit score. You just need to talk to your lender about your financial state and give him all your details beforehand.

Other important facts about second mortgage loans-

• Two common benefits of second mortgage loans– If you have pending high-interest debts or you need to pay off for your home renovations, then second mortgage loans can offer the greatest help. Because these loans have lower interest rates as compared to those of credit cards and can be paid in longer durations.

• Home as a collateral– Of course, you are using your home as a collateral in the second mortgage loans. It means that if you fail to repay your loan, then you may lose your home. Moreover, as you have your loan backed up by a physical asset, so the interest rate of the loan would be much lower.

• Different interest rates from different lenders– Different lenders offer different interest rates on second mortgage loans. So, it is always advisable to contact multiple lenders, ask for the interest rates and then choose the best available deal from them.

• Different qualifying guidelines from different lenders– You might think that all the lenders or brokers offer same interest rates and have same qualifying conditions for primary and secondary mortgage loans. But it is not true. Different lenders impose different qualifying conditions for second mortgage loans. So, talk to the lenders about your financial situation, and choose the most flexible one for yourself.

Why to opt for second mortgage loans?

• Faster procedures– Life might bring emergency medical expenses, home repairs, or educational expenses without even informing you in advance. Such situations won’t allow you to wait for conventional loan approvals. Second mortgage loans have very fast application procedures and can be approved in just a few weeks.

• Lower interest rates– Second mortgage loans have lower interest rates as compared to traditional loans and other payment options like credit cards. So, it is always advisable to opt for a second mortgage loan rather than depending on credit cards for your emergency expenses.

• Clear your pending debts- A second mortgage loan can be the best financial tool for clearing the pending debts at lower interest rates. You can also think of taking education loans, car loans, and other medical loans for dealing with your emergency expenses. But all those loans would have multiple conditions and high interest rates. So, second mortgage loans are the cheapest and best solutions for such situations.

Conclusion
A second mortgage loan is backed up by a physical asset i.e. your home and it has lower interest rates as compared to other traditional loans, so it serves to be the best option for dealing with emergency expenses and home renovations. But it is very important to know about its qualifying conditions and other risks. So, talk to your lender about every tiny detail and then apply for getting a second mortgage loan.