Second Mortgages: What You Need to Know.

Latest News Joni Ferguson 1 Oct

Second Mortgages: What You Need to Know.

One of the biggest benefits to purchasing your own home is the ability to build equity in your property. This equity can come in handy down the line for refinancing, renovations, or taking out additional loans – such as a second mortgage.

What is a second mortgage?

First things first, a second mortgage refers to an additional or secondary loan taken out on a property for which you already have a mortgage. This is not the same as purchasing a second home or property and taking out a separate mortgage for that. A second mortgage is a very different product from a traditional mortgage as you are using your existing home equity to qualify for the loan and put up in case of default. Similar to a traditional mortgage, a second mortgage will also come with its own interest rate, monthly payments, set terms, closing costs and more.

Second mortgages versus refinancing

As both refinancing your existing mortgage and taking out a second mortgage can take advantage of existing home equity, it is a good idea to look at the differences between them. Firstly, a refinance is typically only done when you’re at the end of your current mortgage term so as to avoid any penalties with refinancing the mortgage.

The purpose of refinancing is often to take advantage of a lower interest rate, change your mortgage terms or, in some cases, borrow against your home equity.

When you get a second mortgage, you are able to borrow a lump sum against the equity in your current home and can use that money for whatever purpose you see fit. You can even choose to borrow in installments through a credit line and refinance your second mortgage in the future.

What are the advantages of a second mortgage?

There are several advantages when it comes to taking out a second mortgage, including:

  • The ability to access a large loan sum (in some cases, up to 90% of your home equity) which is more than you can typically borrow on other traditional loans.
  • Better interest rate than a credit card as they are a ‘secured’ form of debt.
  • You can use the money however you see fit without any caveats.

What are the disadvantages of a second mortgage?

As always, when it comes to taking out an additional loan, there are a few things to consider:

  • Interest rates tend to be higher on a second mortgage than refinancing your mortgage.
  • Additional financial pressure from carrying a second loan and another set of monthly bills.

Written by the DLC Marketing Team

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Purchase Plus Improvements Mortgage

General Joni Ferguson 30 Jun

Purchase Plus Improvements Mortgage.

When it comes to shopping for your perfect home, it can be hard to find the exact one ready to go! If you are looking into a home that requires improvements, there is a mortgage product known as Purchase Plus Improvements (PPI). This type of mortgage is available to assist buyers with making simple upgrades, not conduct a major renovation where structural modifications are made. Simple renovations include paint, flooring, windows, hot-water tank, new furnace, kitchen updates, bathroom updates, new roof, basement finishing, and more.

Depending on whether you have a conventional or high-ratio mortgage, if it is insured or uninsurable, and which insurer you use, the Purchase Plus Improvements (PPI) product can allow you to borrow between 10% and 20% of the initial property value for renovations. Additional insight on how the qualifying structure works can be found in the table below:

Type Requirement
Uninsurable $40,000 or 10% of the “initial” value of the property, whichever is less
CMHC Insurable Can exceed $40,000 but not 10% of the “as improved” value of the property.
Sagen™/Canada Guaranty Insurable Can be 20% of the “initial” value of the property but the improvement amount cannot exceed $40,000

The main difference between a regular mortgage and a purchase plus home improvements program is the need for quotes. As part of the verification process, your mortgage professional and the lender will need to see a quote for the work that is planned for the improvements. The quotes will provide us with the cost and plan details required to secure the final approval.

Working with your realtor, your mortgage professional will help guide you through the final approval process, which works as follows:

  1. Find a home
  2. Apply and get approved for a Purchase Plus Improvements mortgage
  3. Get firm quotes on the improvements
  4. Get an appraisal for the estimated as-is and as-improved value of the property.
    • This will be ordered by your lender or broker and quotes are typically reviewed by the appraiser.
    • Note: If you are putting less than 20% down payment on the purchase, often only a final inspection is required to confirm the work on the quotes has, in fact, been done.
  1. Close the purchase
  2. Depending on your down payment, the lender may provide up to:
    • 80% of the as-improved value, less the cost of improvements (if on an uninsured mortgage)
    • 95% of the as-improved value, less the cost of improvements (if on a default-insured mortgage)
  3. Start the improvements
    • The initial advance of funds will be up to 95% of the approved value of the property minus the improvements. You will usually have to pay a portion of the improvements upfront via savings, credit card, personal line of credit, parental funds, etc.
  4. Notify the lender when the project is complete
    • At this point, an inspector/appraiser will confirm the work has been completed to the specifications agreed by the lender
    • Once the lender verifies the inspection report, the balance of funds is advanced.

If you have questions about how a Purchase Plus Improvements Mortgage could work for you or are considering taking this route for your next home, please do not hesitate to contact me for expert advice!

Published by DLC Marketing Team