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It used to be that the three long term commitments in a person’s life were their job, their marriage, and their mortgage. Over the years there has been a decline in the job-for-life ethos and social change has meant people may live together for many years without getting married. The mortgage, however, has stayed relatively similar to how it was, aside from the continuing cycle of rate changes.

What has become increasingly common is homeowners utilizing a second mortgage, either for a fixed sum or line of credit, for personal or property-based reasons.

How Second Mortgages Work

Primary (or “First”) mortgages are a straightforward concept, you borrow a lump sum to purchase a property and pay back the loan, with interest, using the house as a guarantee. A second mortgage takes a more refined approach.

A second mortgage is levied against the equity that has accrued in your property over time. The equity increases in value in several ways; it increases as you pay off your primary mortgage, as the real estate market grows in strength, and when you improve the property’s value through regular maintenance and improvements.

While a primary mortgage is a fixed amount lump sum, secondary mortgages can offer an additional line-of-credit option. With a line of credit, you make the same basic agreement with a lender, a total amount versus the equity value in your property, but you do not have to take the whole sum. Instead, it can be used as a fund that you draw upon as and when needed up to the maximum agreed with the lender.

With both types of loan, fixed and credit, lenders will determine your equity value and then allow you to borrow up to a certain percentage of it, usually topping out at around 80%. This is to protect lenders and borrowers from changes in the market and personal circumstances.

Second Mortgage Rates

Both the lump sum and credit options come with the expected rate options; fixed or variable. While there are many lenders, with many different options, the general rule of thumb is for lump sum loans to include a fixed rate option and for line-of-credit loans to be based on variable rates.

It is also worth noting that interest rates on secondary loans are higher than those on primary loans. This is to protect lenders in the event of foreclosure. If you have a primary mortgage with one lender, and a second with another, the primary mortgage gets paid off first by the foreclosure, with anything remaining going towards the secondary loan.

As with any kind of loan be prepared to do some extensive reading on the proposed fees and penalties associated with your loan. These can run the gamut from paying for credit checks in advance of a loan being approved, right through to closing fees at the end of the loan’s schedule or for early repayment.

What Second Mortgages Are For

As noted above one of the factors in increasing equity value is repairs and improvements to a property.

The core idea of borrowing to make these kinds of improvements is raising the value of your property by a sufficient amount that makes repayment of the loan easier when the time comes to sell. There can also be ancillary benefits to making ecological improvements to a property. Reducing the carbon footprint, or raising the energy profile, of a property can have a tax-deductible benefit to it. This varies across provinces, but it is worth considering if a loan for these alterations could have a tax benefit for you.

A second mortgage can also provide more personal support in the form of debt consolidation. Access to a lump sum can allow borrowers to pay off multiple debts and reduce the total amount of interest they are paying on those debts. By focusing the debt in this way, it becomes more manageable, the risk of defaulting any particular loan is reduced, and a continual series of on-time payments can improve your credit score.

Choosing a Second Mortgage Product

Second mortgages are no different to primary in that there is a great diversity of products available for lenders to choose between. Each with a different set of rates, schedules, penalties, and small print clauses. Borrowers want to get the best deal they can, one that matches their needs, but the sheer breadth of choice can be overwhelming.

At Canadalend.com we have a dedicated team of experts who have decades of experience connecting borrowers to the products that fit their needs and expectations. They can do this because they work independently of any lending organization. They are not being incentivized to sell you a specific product, they work with you to find the right product for you.

Whatever your circumstances, whatever your reasons for considering a second mortgage, contact Canadalend.com today to start exploring your options with one of our experts.

In Canada, over the last few decades, there have been slow but steady changes to industry and employment norms. Where people work, and who they work for, is changing. In the decade leading up to 2017, there was a steady increase in the number of tax returns that included self-employment income. This reporting change was particularly notable for women, who are increasingly taking on sole responsibility for mortgages and property ownership.

While some of the self-employment earnings increase is citizens incorporating a side hustle (crafting, repairs, skills, etc.) into their traditional earnings, it is also indicative of a global trend towards a more liberated model for employment. Working from home is becoming more common as is freelancing and contract work as a sole model of earnings.

While freelancing can sound enticing, working at home, being your own boss, choosing the hours you work, one of the most common hurdles is adapting to fluctuating income, rather than a predictable monthly salary. This can be difficult enough with day-to-day considerations such as food and bills but getting a mortgage can become an uphill struggle.

The Challenges

After the global financial turmoil, the Office of the Superintendent of Financial Institutions implemented and developed the B-20 guidelines, settling on a finalized version in 2017. While the restrictions that were implemented were designed to try to prevent a repetition of the problems that lead to the financial crash, they have also placed the self-employed worker within an undesirable mortgage framework.

Recent predictions of 45% self-employment in Canada have not yet come to pass but are undoubtedly part of the near future. So, as the proportion of citizens that are making some, or all, of their income via self-employment rises, more of them will start to fall afoul of the increased stringency the guideline enforces.

Prior to the B20 guideline, income was part of the approval factor for mortgages, but credit score also played a larger role. Most institutions would give a basic form of approval to anyone with a provable income and a credit rating of 675 or over. Large institutional lenders no longer see entrepreneurs as a sound financial opportunity, Instead, rating them as risky (almost by default) based more on their provable income rather than their credit score. Another factor in self-employed income is the expensing of items against tax which further muddies the perception of an individual’s income.

So, even where an independent worker might be able to prove they have a regular income, perhaps as a result of retainer agreements, they can still be viewed as undesirable borrowers by banks.

How to Prepare

Despite the changes brought in by B-20, there are some steps that the self-employed can undertake to improve their position when approaching a lender regarding a mortgage.

Along with income and credit score, a lender will likely look at your tax status to see if you owe a sum to the taxman. This check usually comes in the form of a review of your standard T1 general tax return and your business and professional activities statement as issued by Revenue Canada. If you do owe taxes, this may be considered as debt you are carrying, so wherever possible make sure you are up to date with your reporting and your payments before starting the loan process.

In order to “win over” a lender, be prepared to provide more information than normal, particularly business-related paperwork such as tax statuses for the business, contracts or agreements that might indicate future earnings, and a variety of other documents at the lender’s discretion. Be prepared by making sure you have as much easy access to your personal and professional financial documents as possible.

Finding a Lender

One of the upsides for self-employed borrowers is the diversity of lenders. Since the millennium, the financial market in Canada has grown and developed beyond the core banking institutions of the last century. A plurality of lenders also means a greater number of products available to borrowers. Products that take into account the financial status of the borrower as well as their aims.

All those products need assessing though, they need to pass your criteria as much as you pass theirs. Will I be protected if my earnings vary? Will I have to make a larger down payment? Will I have a shorter amortization period? Will I pay a higher interest rate?

At Canadalend.com our experts are knowledgeable, helpful and, most importantly, independent. Our experts have decades of knowledge and access to hundreds of lenders and their products. Unlike a mortgage officer at a large financial institution, they are skilled at finding the product that matches your needs, rather than selling you a specific product for a commission. Whether or not that product is right for you.

Contact Canadalend.com today to learn more about how we can help find the right product for you.