How do Second or even Third Mortgages work?
In Canada, many people take out mortgages in order to help them out financially, and this includes first, second, and sometimes even third mortgages. We all know how a first mortgage works; you contact your bank, work out the details, and begin the process of paying the mortgage back. But what about a second mortgage? How does a second mortgage work and how does it differ from a first mortgage? And what about third mortgages? How do THOSE work? Read on to find out.
What is a second mortgage, and how do I qualify for one?
A second mortgage is essentially a home equity loan that allows you to borrow money from the equity in your home without having to refinance your current mortgage. Equity is defined as the difference between the appraised value of your home and the amount owed on the first mortgage. The amount that is available as a loan is based on the equity in the home.
The benefits to taking out a second mortgage are:
- Being able to consolidate debt that has high interest into a monthly payment that has a low interest rate.
- A second mortgage can be used to pay for home improvements and other major purchases.
- A second mortgage can also be put towards paying college or university tuition for your child.
To qualify for a second mortgage, you must have over 20% equity in your home and you must be able to pay the monthly payments on your second mortgage without exceeding your Total Debt Service Ratio (TDS). If you have a low credit score, you may still be able to acquire a second mortgage, though it will be at a higher interest rate than those with a better credit score. Besides your credit score, lenders will also look at the length of time you have been working with one employer, which will provide them with a sense of security, making it easier for you to qualify for the second mortgage.
What is a third mortgage and how do I qualify for one?
A third mortgage is a loan in which the amount lent is based on the value of your property. Since this would be the third in a series of mortgages you have, it will be subordinate to the other two. This simply means that the first and second mortgages will need to be paid off first, before the third. If you take out a third mortgage, you will be paying off all three mortgages at the same time.
The benefits of having a third mortgage are:
- A third mortgage provides you with supplementary funds that you can use as you see fit, meaning it allows you to make improvements to your home or lifestyle.
- A third mortgage can be put towards paying university or college tuition for your children.
- The more valuable your property is the larger the amount you’ll be able to get from your third mortgage, which is usually up to 85% of your home’s value.
To qualify for a third mortgage, lenders are going to look at your credit history and income, focusing on loan-to-value ratio. The more equity you have in your property, the better chance you’ll have of qualifying for a third mortgage. You will need a stable income and a strong credit score to qualify, and you are also more likely to be approved if the lender already holds your second mortgage.