Second mortgage: Everything you need to know about this type of loan and how to get one

Second mortgage: Everything you need to know about this type of loan and how to get one

If you’re a homeowner who needs financing, a second mortgage (or second charge mortgage) from a private lender may be the most optimal solution for you.

This alternative to a home equity line of credit is perfect for all those who need cash urgently—be it for an unforeseen expense, major work, debt consolidation, medical bills or a project start-up.

Second mortgage: What is it and who’s eligible?

As suggested by its name, a second mortgage is additional financing that’s taken out from a second lender and guaranteed by real estate that already has a mortgage on it.

There must be a significant amount of equity accumulated on that property. This net value is the difference between the market value of the building and the lot, and the balance remaining to be paid on the first mortgage. To protect lenders—and buyers too—the combined total balance of the first and second mortgages cannot be more than 75% of the property’s market value.

If your residence is worth $500,000 and the capital to be paid back on the initial financing is $200,000, then you could get a second mortgage for $175,000. You would then have a total amount of financing of $375,000 (75%) and a net value on the property of $125,000 (25%).

Unlike financial institutions, which require a credit investigation and have strict criteria on the borrower’s income, private lenders like Victoria Financial give more importance to the transaction’s intrinsic value. A second mortgage may be highly useful to entrepreneurs, self-employed people or others not entirely meeting the criteria of conventional financial institutions.

Poor credit file: Is it still possible to get a second mortgage?

Yes. It is possible for a borrower whose credit file isn’t spotless to get a second mortgage because a private lender’s primary consideration is the net value of the property. A person with a credit rating under 600 who’s looking for a second mortgage may find it very difficult to have their case heard by the banks, but a private lender may be more welcoming.

Obviously, even if a private lender doesn’t have conditions as stringent as the large banks, they must still make sure the borrower is solvent. The main difference is that the private lender has the capacity and the flexibility to adapt to borrowers with a more atypical profile or facing a situation that doesn’t match the service offering of major financial institutions.

What are the major criteria to take out a second mortgage?

With Victoria Financial, borrowers must meet these three major criteria:

  • Their property must be a single-family home, a condo or a commercial or income building.
  • The property must be located in a serviced urban area.
  • The amount of the current mortgage and the second mortgage together must be equal to or less than 75% of the value of the property.

What are the terms and interest rates of a second mortgage?

By offering easier-to-access, flexible financing, the second mortgage lender takes on more risk. For instance, in the event of a payment default, the lender of the first mortgage will be repaid first when the asset is repossessed. For that reason, the borrower should expect to pay a higher interest rate on this type of financing. 

 

However, the second mortgage only requires payment of the interest during the loan period. It’s only at term (generally 1 to 2 years), that the capital must be reimbursed. 

So, this can be a valuable financial tool for those expecting a large sum of money in the medium term but who need liquidity now. 

Overview of the advantages of a second mortgage

  • Gives fast access to significant liquidity
  • Has less strict eligibility criteria (e.g. allows for a poor credit file)
  • Determining factor for granting the loan is the property’s net value
  • Only the interest must be paid until the loan comes to term

A better second mortgage, is it possible?

Why repay a Fairstone or EasyFinancial loan using a loan from Victoria Financial?

Here’s how to pay less by repaying a Fairstone or EasyFinancial second mortgage

When the conventional banking system refuses financing, alternative lenders like Fairstone and EasyFinancial can offer a practical solution to get back on your feet or finance a project. There are many reasons why major financial institutions will reject a loan request and these are sometimes unclear or even unfair. They include a recent credit report, a low credit ranking and unstable income. Since they use a different analysis grid, Fairstone and EasyFinancial offer a personal loan alternative for people who have been rejected by the big banks. However, these financing solutions cost more.

Victoria Financial has a different and highly personalized business model. We’re a private lender that can help not only those who’ve been refused by their bank but also those who already have (or are getting) financing from Fairstone or EasyFinancial.

A more advantageous second mortgage

Personal loans from Fairstone (up to $25,000) can have an interest rate of up to 39.99%. As for EasyFinancial, the unsecured loan limit is $20,000 and the interest rate listed on its website is 29.99%.

The rate for loans secured by a mortgage (second mortgages) may be slightly better than for personal loans, but they remain high. Since these two companies can grant mortgages on properties where the debt ratio is close to 100%, their risk is great, and it’s the borrower who pays the cost.

And considering that both EasyFinancial and Fairstone require that monthly payments include repayment of a portion of the capital in addition to the monthly interest, the bill can end up being pretty hefty. The obligation to pay back capital throughout the financing period can quickly become constricting for someone starting-up a business or facing a lower revenue period. 

“Second mortgages are more advantageous than unsecured loans”

Victoria Financial on the other hand lets you pay back the capital at the end of the loan’s term. The borrower only has to pay the interest during the loan period. Another big advantage is that the rates offered by Victoria Financial are substantially more advantageous than those of Fairstone and EasyFinancial.

Here’s a comparison of the monthly payments of Fairstone vs. Victoria Financial for the same loan:

Loan amount

Fairstone*

Victoria Financial

$10,000

$213/month

$125/month

$20,000  

$426/month

$250/month

$30,000

$640/month

$375/month

*Calculations taken from the Fairstone website https://www.fairstone.ca/en/tools/payment-calculator; amortization of 120 months, good credit standing.

How can Victoria Financial offer better payment terms and better rates? Loan approvals area based on the net value of your home and the upper limit is set at 75% of that value. EasyFinancial and Fairstone will sometimes finance up to 100%. It’s this higher risk that leads to higher interest rates. 

In short, it’s easy to calculate. If your home’s net value (market value minus mortgage balance) is over 25% of its market value, then a loan from Victoria Financial will undoubtedly be more advantageous to you than those offered by EasyFinancial and Fairstone.

Example of a calculation of a property’s net value

Market value: $400,000 

Current mortgage loan: $250,000 

Net value: $150,000 

Current debt ratio: 62.5% ($250,000 ÷ $400,000 = 0.625)

You can use Victoria Financial’s free mortgage calculator to figure out how much financing you could get.

And if you already have a loan from these lenders, you could save thousands of dollars by repaying the remaining balance using financing from Victoria Financial.

What’s more, the eligibility criteria used by Victoria Financial are different from those of its competitors, who give more weight to your credit record and proof of income, like conventional banks do. 

At Victoria Financial, personalized service lets us concentrate on the criteria that truly matter: 

  • The property is a single-family home, a condo, a commercial or income building, or a lot.
  • The property is located in a serviced urban area.
  • The financing amount is 75% or less of the property value.

Sometimes, you just need to shop around a little to reduce your monthly payments a lot. Case in point: doing business with Victoria Financial!

RRSP: Maximise your RRSP contribution with a second mortgage

RRSP: How a second mortgage can make your RRSP contribution more profitable

February may be the shortest month of the year, but it can also be the most profitable if you take advantage of it to contribute to your RRSPs before the deadline (March 1, 2022, for the 2021 tax year). There are several options that let investors maximize the many short- and long-term tax benefits of this type of registered account.

Taking out a second mortgage is one option that can help you make the maximum RRSP contribution. This is a highly profitable strategy that any homeowner can take advantage of. But before we look at this course of action, let’s review the main advantages of RRSPs.

What are the benefits of an RRSP?

1.    Reduce your tax bill

The money you put into your RRSP is tax deductible. In Quebec in 2022, someone with a taxable income of $50,000 to $85,000 for the previous year will receive a tax deduction of $371 just by contributing $1,000 to their RRSP (marginal tax rate of 37.12%).

The higher your income, the more the RRSP becomes an advantageous investment vehicle. If your taxable income is higher than $160,000, which brings your marginal tax rate to over 50%, then the governments will deduct half your RRSP contribution.

2.    Grow your money, tax-free

The money in your RRSP is not taxed so long as it stays in the account. Only withdrawals are taxed. Since your taxable income after retirement is substantially lower, so is the marginal tax rate. Therefore, you not only benefit from a tax break during your working years, you also get to fully enjoy the power of compound interest, since RRSP gains aren’t negatively impacted by taxation for a long time.

Also noteworthy is the fact that the Lifelong Learning Plan (LLP) and Home Buyers’ Plan (HBP) let you borrow from your RRSP to finance studies or the purchase of your first home.

The important thing to remember is that, in most cases, for salaried employees but also for many entrepreneurs, the RRSP is a fiscal tool whose financial advantages are too generous to overlook.

Is it a good idea to borrow money to make an RRSP contribution?

Yes. It’s a purely mathematical decision: If the interest rate on the financing is lower than the overall rate of return you’ll get from contributing to the RRSP, then it’s worth borrowing money to make that contribution.

Why take out a second mortgage to make an RRSP contribution?

While it’s often worth it to borrow money to contribute to your RRSP, it can be difficult for some people to get financing from conventional financial institutions.

Here’s an example:

Audrey got a big promotion at the beginning of 2021 and her taxable income for the year was $120,000. She took advantage of the raise to pay back her credit card. Then she had a large unforeseen expense in January 2022. This considerably reduced the amount of cash she has on hand to contribute to her RRSP before the March 1st deadline.

Because of her high salary, Audrey is taxed at close to 32%. And her marginal tax rate (the rate she pays on every additional dollar of income) is over 47%.

Fortunately, she can contribute up to $21,600 to her RRSP (18% of her salary), which substantially reduces her tax bill.

She decides to borrow $20,000 to benefit from the high contribution ceiling and pay less in taxes.

Given that she had accumulated several late payments in 2020, her credit rating is still too low to meet her bank’s criteria. She goes to a private lender to get a second mortgage. Since the loan is based on her house’s net value, she quickly obtains the amount, which she puts into her RRSP.

This contribution gets her a tax refund of $9,400! She uses this amount to pay back close to half her loan.

She ends up with $20,000 more in her retirement savings, an amount that will generate a lot of interest over the years. The balance of her loan is already under $11,000. Assuming a normal return on her savings and a standard interest rate, the real cost of her loan will end up being negative.

In other words, this loan will have made her money. Borrowing to contribute to your RRSP is a financial lever that’s accessible to everyone!

Is taking out a second mortgage a good option for me?

Second mortgages are the most popular product at Victoria Financial. The main reason our customers choose this product is simplicity. There is no need to modify the mortgage you currently have with your banking institution. This loan is simply added as a second ranking mortgage on your property. Here are the answers to the most frequently asked questions on this matter. 

What documents do I need to provide?

When applying for a second mortgage with a private lender, you will need the following the documents, all of which you probably already have on hand:

  • 2 pieces of identification;
  • a void cheque for the transfer of funds and monthly payments;
  • a mortgage statement for your current mortgage;
  • the certificate of location for your property (if you have it);
  • a copy of your home insurance.

Does my income or credit score impact my chances of getting a second mortgage?

With Victoria Financial, the decision to grant you a second mortgage is based solely on the equity available in your property. For most Quebec cities, we offer financing for up to 75% of the market value of a property. So, if the balance on your first mortgage plus the amount requested on the second mortgage does not exceed 75% of the value of your property, your chances of being approved are excellent. You can use our mortgage calculator to see the loan amount you could be eligible for.

Why not just take out a personal loan?

If you qualify for a personal loan with an interest rate of under 10% with a traditional banking institution, go for it! That option will definitely be cheaper than a private mortgage loan.

However, if the only option available to you is a personal loan at an interest rate of 19.99% or above, it will definitely be cheaper to go with a second mortgage.

In addition to usually having a lower interest rate than personal loans, a second mortgage with Victoria Financial will not appear on credit reports, so your credit rating will not suffer.

How do I pay off my second mortgage?

La grande majorité de nos

The vast majority of our clients take out a second mortgage in order to consolidate their debts. Once their debts are paid off, they focus on improving their credit so they can qualify for global refinancing with a traditional bank within 12 to 36 months.

Others keep their loan for a longer period, depending on their priorities.

How can I apply for a second mortgage?

Apply online via our website or call our underwriting department at (877) 220-7738, extension 1.

Second mortgage: 3 reasons why you should use it to consolidate your credit card debt

In the last decade, due to our easy access to credit, credit cards have been overused by most of us. Some are now left with an unmanageable balance that they won’t be able to refinance in their actual mortgage, as lending standards have tightened dramatically. The solution to this problem: consolidating your debt with a second mortgage! Here are the 3 reasons why you should use it to consolidate your credit card debt:

1. Reduce your monthly payment

If you choose not to pay the full balance owing on your credit card, you must pay at least the minimum payment due each month to maintain a good credit rating. This minimum payment may also include 1% of the capital, any past due amounts and any portion of the total new balance owing that exceeds your credit limit. For example, the minimum monthly payment on a credit card with a $30,000 balance at a 29.99% interest rate would be approximately $1,050.00.

Most private lenders will offer second mortgages with interest-only payments. Therefore, a second mortgage of $30,000 with a compound interest rate of 15%, which is the industry standard, will require a monthly payment of $375.00. It is a simple way to reduce your monthly payment by 64%!

2. Improve your credit rating

Here are the 3 ways the second mortgage will impact positively your credit score:

  1. By reducing the number of creditors, your credit score will improve even though the debt amount is the same.
  2. As the monthly obligations are lower, your credit score will improve.
  3. Some of the private lenders such as Financière Victoria do not report their clients to credit agencies. Consequently, the amount you borrow and your monthly obligation won’t show on your credit report. Your credit score will skyrocket! If your credit score was stopping you from refinancing, it won’t be a problem anymore.

3. Lower the interest rate

The second mortgage rates depend on the amount of equity on a property. They vary from 12% to 18%, while most credit cards’ interest rates range from 12% (if you are very lucky) to 34%! Even though your second mortgage’s rate would be higher than your credit card’s, the importance of lowering your monthly payment and the positive impact on your credit is way more important in the long term than the actual interest cost.

 

By not taking action, a person with a high balance of credit card debt will never be able to improve their situation, as their low credit score will always be an obstacle refinancing with a conventional financial institution. A second mortgage with a private lender would put an end to that situation.

If you have additional questions regarding the possibility of consolidating your debt with a second mortgage, or if you are currently looking for a second mortgage, feel free to contact me at maxime.st-laurent@financierevictoria.com.

Recent article: 2 obvious reasons to opt for a second mortgage versus refinancing your first mortgage

2 obvious reasons to opt for a second mortgage versus refinancing your first mortgage

First, what is a second mortgage?

A second mortgage is a second lien on a property, residential or commercial, that already has a first mortgage registered. Second mortgage loans sit in the second position on the property, behind the first mortgage loan. A home or business owner can obtain a second mortgage easily once they have built up enough equity in their property. Second mortgages allow property owners to withdraw money from the accumulated equity without impacting the first mortgage.

Has your property value recently gone up? Or do you nearly have that first mortgage entirely paid off? If the answer is yes, a second mortgage may be an option for you.

Here are the obvious reasons to opt for a second mortgage versus refinancing your first mortgage:

1. Avoid mortgage prepayment penalty of your current mortgage

By breaking your current mortgage to refinance, you are exposed to a prepayment penalty, which could range from as little as 3 months of interest in a case where you have a closed variable rate mortgage, but can reach as much as 10 per cent of your mortgage balance, if you have a closed fixed rate mortgage. Let’s say there’s 36 months left before the maturity date of a $400,000 mortgage loan signed at 4.39% and the actual posted annual interest rate is 2.99%. Your prepayment penalty would be of approximately $16,800. By opting for a second mortgage, you won’t have to repay your current mortgage, and you’ll save on prepayment penalty.

2. No debt-to-ratio and credit score requirements

If you opt to refinance your current mortgage, you will have to go through a tough qualification process and comply with the bank’s debt-to-income ratio and credit score requirements. This could affect your chances of getting a second mortgage pretty quickly. If you apply for a second mortgage with a private lender, your debt-to-income ratio and credit score won’t be part of their qualification requirements. Qualification for a second mortgage will normally be based only on the value of your property.

Obviously, this applies for a second mortgage with private lenders, as conventional banks that are offering second mortgages will require you to comply with their standard debt-to-income ratio and credit score requirements.

Even though you may incur additional notary fees for getting a second mortgage, most of the time, those fees are inferior to the prepayment penalty of your current mortgage and that mortgage is way easier to obtain. Do you have additional questions related to second mortgages, or are you currently looking for a second mortgage? Contact me at maxime.st-laurent@financierevictoria.com

Recent article: Second mortgage: 3 reasons why you should use it to consolidate your credit card debt