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Second Mortgage Brokers in Toronto

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Benefits of Second Mortgages in Toronto

A second mortgage Toronto is the second loan taken against your home and it is secured with your home as collateral. The first such loan against your home or property is your first mortgage. In the event of a default, the first mortgage will hold priority and will be repaid first. The proceeds from the sale of your house will be paid first towards your first mortgage and the remaining amount will then go to the second mortgage. Second mortgages are usually amortized loans, which are repaid according to a pre-decided schedule.

How you can benefit from second mortgages in Toronto?

Second mortgages allow homeowners to use the equity in their homes to meet important or urgent expenses. A popular reason for taking out second mortgages is to fund home improvements or do remodeling to enhance the value of the house that will enable the house to fetch a good resale price.

Second mortgages can also be used to pay off credit card debt through a process known as debt consolidation. The interest rates on a credit card are very high and debtors often struggle to repay the money they owe on different cards. This high-interest debt can be consolidated into a single, reasonably low-interest debt by taking out a second mortgage. The rates on second mortgages in Toronto are lower compared to credit card rates. Your multiple debts are combined into a single debt, making your life much easier. All you need to do is make timely monthly payments and you can become debt-free very soon.

You can also use this mortgage for meaningful expenses such as your children’s college or tuition fees. Some business-savvy homeowners also direct the funds from a 2nd mortgage towards low-risk and high-profit investments or sometimes purchase a second property with the money. It is easier to qualify for a 2nd mortgage if your approach your current mortgage lender. The lender may also waiver some fees, such as the origination fee or application fee.

Pitfalls of second mortgages in Toronto

Second mortgages from your existing lender come with a higher interest rate than the first mortgage for the obvious risks involved with such a home loan (as the first mortgage is prioritized if you default). A valuable asset such as your home is put at risk when you take out a 2nd mortgage. If you fail to make payments on time, you can face foreclosure and your whole world might just come crumbling down. So make sure you take out this mortgage only if you can justify the expense. Though your lender may waive certain fees, you will still have to pay the closing costs and other charges, which can add up to a significantly high amount.

It is no denying that a second mortgage is a great option to convert home equity into liquid assets, you should think twice before exercising this option. You can either approach your existing lender for a second mortgage or pick one from the several 2nd mortgage lenders offering competitive rates and terms in your city.

The following are 3 critical tips for managing a second mortgage:

Select the appropriate timing

The first critical tip for managing a second mortgage is to choose the appropriate timing. When a lender conducts an analysis of your finances to determine whether you are a good candidate for a loan, timing is critical. Six months prior to applying for a loan, you should abstain from making any large purchases that could have a temporary negative impact on your finances and credit score. For instance, avoid purchasing a car, space out your home purchases, and avoid opening a credit card to obtain additional funds. These factors may have an adverse effect on obtaining a second mortgage immediately.

Consult with a seasoned mortgage broker

The second piece of advice for managing a second mortgage is to work with a reputable second mortgage Toronto broker. Because purchasing a second home can be significantly more complicated than purchasing a primary residence, a mortgage broker can assist you in navigating the various mortgage and tax options available to you. For instance, suppose you’re purchasing a second home from a family member who wishes to give you a gift of equity to cover the down payment costs. A seasoned mortgage broker will understand how to navigate these unique circumstances and get your second mortgage off to a good start.

Keep distinct bank accounts

Another management tip for a second mortgage is to maintain separate bank accounts. Not only will separating funds help you stay organized, but it will also assist a lender in determining your financial fitness when it comes to approving you for another mortgage. Keep in mind, however, that transferring large sums of money between accounts in the six months prior to working with a lender is not a good idea, as it may have a negative effect on how the lender views your finances in certain events – but not always. Contributing to a separate bank account for your second mortgage for a year or more is an excellent way to stay on top of your finances while preparing for a second mortgage.

Silent Second Mortgages – Are They Legal

Borrowers take out second mortgages against their homes to fund large expenses. Medical bills, college fees, and home improvement/remodeling are some of the common expenses that borrowers pay off by taking such mortgages. There are some borrowers and sellers who also enter into a ‘silent second mortgage’ agreement. This is most often unethical and in many cases outright illegal.

What are silent mortgages?

Second mortgages in Toronto that are created without the knowledge of the first mortgage lender are called ‘silent second mortgage’. They are mostly taken because the borrower cannot afford the down payment of the first mortgage.

For example, Borrower Bill takes a first mortgage from Lender L to finance a house worth $200,000. The down payment he needs to make is $20,000. Now, Bill can afford only $5000 and the seller of the house agrees to loan him the rest of his down payment (i.e., $15,000). This seller-buyer loan is a mortgage on the house property that is concealed from the first mortgage lender in Toronto. This is the silent second mortgage.

Why are such mortgages concealed?

· The capacity of the borrower to make the down payment often plays an important part in determining the total loan amount. The first mortgage lender’s calculation of the borrower’s repayment capacity also takes into account the amount of cash he can offer up upfront.

· When the borrower pays only a fraction of the actual down payment, his exposure in the home is dramatically reduced. For example, Bill has a total exposure of 2.5% in the home with his $5000 down payment. The first mortgage lender believes that he has a 10% exposure with a $20,000 down payment. The risk of default faced by the first mortgage holder is immensely higher with Bill’s lower down payment. This is especially dangerous in scenarios such as the housing crash crisis when home values hit rock bottom. Homebuyers with low exposure are likely to simply walk away from their loan leaving the home ‘underwater’.

Risks for the seller

The lender also faces a higher risk of default by the borrower. In addition, as this mortgage cannot be documented until the first is finalized, a silent mortgage is often an ‘informal’ agreement. In other words, there is no written legal agreement, meaning that this is an unsecured loan with no recourse in the case of a default.

The question of legality

Silent second mortgages in Toronto are most often illegal for the above reasons. The borrower deliberately misleads the first lender about his financial circumstances by hiding the loan. But there are some situations where these mortgages can be taken legally.

It may be taken in the form of a subsidized mortgage that is waived once certain conditions are fulfilled. One example is the Good Neighbor Next Door program sponsored by the HUD. There are also other circumstances where such a mortgage can be taken in line with the law.

A silent second mortgage may seem to be a wonderful lifeline to a home buyer who cannot afford a down payment. Both seller and buyer need to understand the legalities of such an agreement before entering into a deal.

You should avoid using silent second mortgages.

A quiet second mortgage occurs when a property buyer discreetly obtains a second loan from another lender or a private investor to fund their down payment. This is because the existence of this loan is concealed from the initial lender, which is against the law. For the primary lender, it will appear as though the borrower invested his own money while the funds are actually borrowed.

Another possibility is that the seller gives the buyer some or all of the money required for the down payment, with the understanding that it would be repaid over time. While this may appear to be an innocent transaction, it is nevertheless deemed fraud because the lender is ignorant that the purchaser is putting down virtually nothing.

A more egregious fraud occurs when the silent second is utilized to inflate the sale price over the actual home value in order to increase the first mortgage’s size. Assume the buyer and seller agree on a price of $400,000, but the buyer does not have any funds available for a down payment. The buyer and seller conspire to fix a fictitious price of $444,400 on the assumption that the first mortgage lender will lend $400,000 on the grounds that the first mortgage lender agrees to lend $400,000. This is 90% of $444,400, but 100% of the actual worth of $400,000. The seller agrees to a second mortgage in the amount of $44,400 but will forgive it after the deal is finalized. This is dishonest because the lender writes a 100% loan under the mistaken belief that it is a 90% loan. (This is an excerpt from The Mortgage Professor.)

Guide to Second Mortgages in Toronto

Many people do not realize that they can take second mortgages on their property. Some properties even have more than two loans on them. So, what is a second mortgage? It is a second loan taken on your home, on which a primary mortgage already exists. Complete or part of the owned home equity acts as the collateral for a second mortgage in Toronto.

Your second loan will be a lower priority compared to the first legally. In the event of a default, the primary mortgage will be paid off before the second mortgage. If you have refinanced your first loan after you have taken out a second mortgage, you have to put in a request to the lender for the subordination of your second loan. In case you do not do this, the second loan will be given priority over the first.

Circumstances under which you can opt for second mortgages in Toronto

  • If you have chanced upon an investment scheme that looks promising. The requirement here is that the return on investment should be higher than the interest rate of the second mortgage, which is the only profit-making scenario.
  • If you are in debt that has accumulated over the years in the form of auto loans or your child’s tuition fee that you need to pay off, you can consider a second mortgage.
  • If you get a loan that is about one-fifth of your original home purchase amount, you can avoid the payment of private mortgage insurance.
  • It is a fact that the interest rates of the second mortgage loan are higher than those of the first mortgage. And this is so because, in the event of a default, the first mortgage will have priority over the second. It is also a fact that the second loan is offered over a lesser period than the first loan.

What it does not mean

A second mortgage in Toronto does not mean it would save you from the first mortgage. A track record, which shows that you have not been paying your first mortgage judiciously, will affect your chances of getting a second mortgage negatively. If you have a good record of payment on your first mortgage, it would be easier to get a bank to finance your second mortgage.

How to get the right second mortgage in Toronto

Researching and shopping for the right second mortgage in Toronto is very important, as you need to be aware of all your options. Do not accept the first loan offer that you get. Instead, compare all offers you receive to pick the one that best suits your financial situation.

Read the fine print

Ensure that your loan doesn’t come with a costly prepayment penalty. This is to have the option to clear off your second mortgage and avoid paying the full term interest in case your earnings increase in the future.

Reading carefully all the documents you are required to sign and be in complete agreement with all the terms and conditions is extremely important. Knowing as much as you can about second mortgages and how they work will always come in handy.