When shopping for second mortgage rates, the most frequently asked question from Ontario homeowners is, “what are the best rates I can get?” There’s no easy answer! However, in order to demystify the question, we need to understand the conditions and decision-making process of private lending.
Why A Second Mortgage?
There are many reasons why you would consider getting a second mortgage. Primarily, it is because you have a need for additional funds. The purpose of the funds could be for virtually anything. For example, to consolidate high interest debt (such as credit cards and car loans). Perhaps it could be for renovating your home to increase its value. Or, it may be used as a down-payment on a rental property purchase. Whatever the case may be, you may have accumulated sufficient equity in your home that could be used for this purpose.
Why Not Go To A Bank?
Here’s where the challenge lies for many homeowners. It would seem logical to return to the bank that holds your first mortgage (or principal mortgage) to apply for additional funds. After all, bank rates are generally more favourable than private rates (more on why later). In fact, if we feel clients may qualify at the bank, we are more than happy to search and exhaust those channels first!
The challenge is due to the bank’s strict lending rules (and now stricter rules due to COVID-19). Currently, the bank will approve a home equity loan if you have:
- Excellent credit (FICO score above 680)
- Substantial equity in your property (meaning your house is worth a lot more than what you owe on your mortgage)
- Low debt service ratio (meaning you’re not drowning in debt)
- A good steady paycheck (meaning if you’re self-employed, you may be out of luck)
Ironically, the more you need the funds, the less likely you are to get approved by a bank.
Even if all the stars aligned and you could qualify at the bank, you may need to opt for a private second mortgage instead. Banks can take weeks to underwrite your application and get you approved. In addition, the average time to get your funds is about 30-45 days. In contrast, a second mortgage can be closed as quickly as 24 hours, which could mean the difference between buying that awesome rental property, or losing your deposit.
Now that we know what the bank expects from you to qualify, let’s examine what private lenders expect. The first thing to realize is…
There Are No Standard Rules
This is one of the most important things you must know about second mortgage rates. That is, there are no hard-fast rules. In fact, documents and other requirements vary widely from lender to lender. Hence, this is why you may get a wide range of rate quotes and underwriting requirements from different mortgage brokers. (keep reading to find out how to avoid this situation)
So, how do lenders determine the second mortgage rate they offer you? The simple answer is, it depends on the risk the lender is willing to take.
#1 Consideration: Your Property
Although there are no set rules, the main risk that all private lenders consider is your property. They want to ensure that the value of your property is accurate and that it is highly marketable.
Therefore, lenders consult real estate databases to analyse these example questions:
- How desirable is your home?
- How quickly have similar houses in the neighbourhood sold, and for how much?
- What is the price trend and economic stability in your area?
- What is the condition of your home?
- Does it require major repairs?
Also, it is important to note that lenders tend to have a preference for specific geographic areas. One lender may prefer to lend on rural properties, while another within major urban areas. Consequently, if you approach a lender that doesn’t prefer your area, you may get quoted higher rates.
Generally speaking, private lenders can be classified into 2 categories:
- Equity Lending
- Full Underwriting
These types of lenders look solely at the value of home, less any mortgages that are on your property. This is what is called “Home Equity.” There are no questions about your employment, your income, or your credit score (although they want to know you’re not bankrupt). Therefore, if you have equity in your home, you can borrow up to 85% of the value of your home as a second mortgage.
A lender will generally ask for an appraisal, or verify the value of your property with a home inspection. They will also need to verify your current mortgage balances. Thus, if the value of property is to their liking, congratulations, you are offered a second mortgage!
Note that, with far fewer questions, the second mortgage rates are generally much higher. Also, the less equity you have on your property, the higher the rate. This only makes sense, as the lender is taking on far more risk of default.
These types of lenders take much more into consideration. In addition to examining the value of your property, less any outstanding mortgage balances, they ask more questions. They want to make sure you can make the mortgage payments without any issues or defaults. Questions may include the following:
- Prove your income (with bank statements)
- Prove CRA taxes are up to date (with your NOA – Notice of Assessment)
- Explain your poor credit
- Explain the purpose of the loan
- Have a solid exit strategy (i.e. how you will repay the loan)
Lenders may ask any or all of the above questions. Even if your situation is not ideal (because, let’s face it, if it were, we would instead take you to the bank), these lenders are far more lenient than the bank.
Generally speaking, the more questions they ask, the lower the risk of default. Consequently, the second mortgage rates will depend largely on how you answer these questions. The rates will also be higher the less home equity you have. Everything considered, these rates tend to be lower than that of Equity Lenders.
What’s Your Second Mortgage Rate?
This will depend on how many questions you are willing to provide answers for!
In order to get started, examine your own situation, and see where you fit into the table below. The further down you go, the higher the second mortgage rates.
|Asks tons of questions. Needs proof for every response. Excellent Credit & Lots of Equity.||BanksB-Lenders||3 – 9%|
|Asks fewer questions.More forgiving for income and credit.||MICsPrivate Institutions||7 – 12%|
|May ask some questions about income and credit.Equity in your home is the main qualification factor.||Private EquityLenders||8 – 14%|
The Key To Getting YOUR Best Rate
As you can now appreciate, there are many, many factors involved in determining your rate. The key is to work with a broker who has a large network of private lenders, and understands their lending requirements. A broker who represents few lenders will be severely limited to what can be offered to you.
In contrast, we are a well-connected brokerage that can help you navigate the entire market.
First, we examine your situation in detail before making an offer. Then, we determine the best solution that you’re highly likely to qualify for, and work backwards from there. It’s the sensible and logical approach that will save you time and money. Don’t hesitate to contact us to learn more!