How to Get the Best Second Mortgage Rates

In many cases of home loans, the second mortgage rates are almost always higher than interest rates for first mortgages. This is because second mortgage loans carry more risk for the lender as they are placed second in priority on the property’s title in case of non-payment. This means that if there is failure to pay any payment arrangement that the borrower makes is first applied on the first mortgage before any amount can be paid out to the second loan.

A second mortgage is an additional loan made against the same property used for the first mortgage. The amount of the second mortgage loan is usually computed based on the equity of the home.  A home’s equity is equivalent to the appraised value of the home minus how much mortgage is still left to be paid off.

Getting a second mortgage is one of the best way for homeowners to obtain additional funds without needing to refinance their first mortgage. It can be very useful to help finance other major projects such as:

•          To consolidate high interest debt and pay it off into one low interest rate every month

•          To finance a home renovation or home improvement

•          To use as capital to start a small business

•          To help pay for college education

Second mortgage loans are very popular in the private mortgage market, but not everyone can easily qualify. Private lenders are careful of the risks they are taking in these types of loans so they take extra steps to evaluate a borrower’s personal and financial situation.

Lenders will look at four areas to determine if a borrower is eligible:

1.         How much equity do you have? The standard rule is that you must have over 20% of equity in your home to qualify for a second loan mortgage. However, the higher the amount of equity your property has, the better your chances of getting approved for a second loan.

2.         How much income do you earn? Lenders will look at how much income you earn and how much debt you are paying off to determine if you are able to make monthly payments on your second mortgage without exceeding your Total Debt Service Ratio (TDS). They’ll also look at your employment status and the length of time you’ve been with your employer, to make certain you have a dependable source of income and can make steady payments on your loan.

3.         How much is your credit score? Your credit score is needed to determine the interest rate for the second mortgage. Generally, a high credit score is given a lower interest rate. If you have a low credit score, you can still be eligible for a second mortgage but will likely be charged a higher interest rate.

4.         Is your property secure? This makes a second mortgage a secure loan because lenders will take your property as security in case you default on payments. Make sure there are no issues tied to your property as the smallest detail could cost you the loan altogether.

Most homeowners find the best second mortgage rates with the help of a mortgage broker. Working with a mortgage broker can help make the whole process of getting a second mortgage stress free for you. He can help you shop around with different lenders and get you the best possible rates that meet your needs.

What Other Costs are included in the Best Mortgage Rates in Toronto?

In Toronto, the best mortgage rates often do not include other expenses that are involved in buying a home or property. There are additional costs to consider that can amount to thousands of dollars and will significantly affect the final price of the transaction.

Here are some of the extra costs to keep in mind in addition to the mortgage amount: 

Property valuation fee

Lenders charge this fee to find out what your property is worth. They need to do this so they can be sure that if you fail to repay your loan, they can repossess the property and get back the amount of the loan when it is sold. The cost of property valuation is determined by the lender and the purchase price of the home.

Home inspection fees

A home inspection is an evaluation of the home’s overall structure and systems. It is considered a safety measure to reduce a purchaser’s risk when buying a home, so many people stipulate it as a requirement in their Offer to Purchase.

Property survey

This survey will determine property boundaries, land measurements, any easements and encroachments on the property that may affect legal title. This is a lender’s requirement for them to obtain a clear lender's title insurance policy covering the face value of the mortgage.
Legal fees and related expenses

These fees are professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches, mostly for obtaining and clearing the title to the land or property. Make sure your lawyer enumerates all specifics that are related to this expense and not just merely indicate them as legal fees. Also scrutinize your Offer to Purchase with your lawyer or notary before signing on the dotted line.

GST/HST where applicable

GST/HST are taxes on purchases of property. Some properties are sales tax exempt, but generally these sales taxes are charged on new homes and not on resale purchases. The amount charged will vary depending on provinces and can be paid either through your mortgage or with cash on closing day.

Title insurance

Some lenders will require this as safety measure in the event there is some discrepancy on the property’s title, such as encroachment issues, title fraud, or undischarged mortgages that would potentially create a legal problem. In some cases, lenders will ask for this as an alternative to a property survey.

Insurance costs

If you pay down payment that is less than 20% of the purchase price of the home, your mortgage will be considered a high ratio mortgage and is required by law to be covered by mortgage default insurance. You can pay this upfront before closing or choose to add this to the principal amount of your mortgage, which in this case will incur additional interest that is at the same rate charged on the principal amount of your mortgage loan.

Some lenders will also request for your mortgage to be covered by life/disability insurance to guarantee that you are able to meet payments in the event that you or your co-borrower become disabled or die during the term of the mortgage.

Home insurance

Lenders usually make this a mortgage requirement. It protects your home and all it contains in the event of a fire, theft, storm, liability claim, or other unforeseen event. In case there is damage to your home or property, your insurer, not you, will pick up the tab.

Many Canadians when they are searching for the best mortgage rates in Toronto often make the mistake of failing to take into account all of these extra costs and fees that’s included in the housing loan. It really pays to enlist the help of a mortgage specialist to help you identify the different costs that you might incur at each stage of the home buying process. With good research and good advice, you won’t likely encounter major hurdles in buying the home of your dreams.

Steps to Getting a Mortgage

When getting a mortgage, it’s recommend that you get pre-approved before you even start looking for your dream home.  The pre-approval process will help determine a specific amount that you can borrow at a certain interest rate based on your qualifications and personal credit rating.

Pre-qualification vs. Pre-approval

A mortgage pre-qualification is an informal discussion with your mortgage specialist where general questions will be asked about your income and personal finances and an estimate will be given of how much you can more or less afford as mortgage. No amount is final, no guarantees are made.

A pre-approval is more to your advantage because it provides a specific loan amount at a certain interest rate that is guaranteed for a particular time period such as 30 days or 90 days, depending on the lender.  Getting pre-approved means that the lender has actually checked your credit information and verified your documentation and deemed you “qualified” to be granted a mortgage loan.

Benefits of Getting Pre-approved

Getting pre-approval for a mortgage has several benefits to you:

1.       A guarantee on a certain interest rate for up to 120 days. In case interest rates go up within the specified time, the agreed rate on your pre-approved mortgage will not be affected. If the rates drop, then you will get the lower rate upon final approval.

2.       You know what your buying power is when searching for a home. This will help you set realistic expectations and consider houses that are only within your maximum budget. Also, being aware of a specific price range will put you in a better position to negotiate prices.

3.       You have a higher chance of closing the deal on the home you want to buy. Sellers are likely to deal with buyers who are pre-approved because it assures them that you can secure a mortgage and bid on the property.

4.       You will be able to calculate how much your mortgage payments and other costs will be. This will allow you to evaluate your budget and see if you can really afford to buy a house now or need additional time to save up some more.

Qualifying for a Mortgage

Your mortgage lender will take into consideration both your income and your debts during the process of pre-approval. They will use these formulas to determine the loan amount they can lend to you.

·         Gross Debt Service (GDS) ratio. The percentage of all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees, if applicable) divided by your gross income (income before deductions). Your GDS should be 32% or less to qualify for a mortgage.

·         Total Debt Service (TDS) ratio. The percentage of your gross income needed to pay all housing costs (GDS) plus all other debts, such as car payments, credit cards, alimony, and any loans. Industry standards for TDS shouldn’t be higher than 40%.

Documents and Requirements for Getting a Mortgage

Here is a list of documents and information that lenders will use to get you pre-approved for a mortgage:

·         Proof of Identification

·         Proof of income - If employed, salary and length of employment. If self-employed, minimum 2 year history of self-employed earnings is required. Proof of any additional income such as alimony or bonuses.

·         Good credit - Lenders will request a credit report from any one of the two credit reporting agencies in Canada, Equifax or Trans Union to check your credit score. A credit score above 680 usually guarantees better interest rates and terms.

·         Proof of assets to prove that you have funds for the down payment and closing costs, as well as cash reserves. This can be:

o   Bank statements

o   Investment account statements

o   Vehicles owned

o   Other property owned

·         Information on your liabilities: credit card balances, lines of credit, car loans, student loans

·         Name, address, telephone number of your solicitor/notary

It’s always a good idea to work with a broker when getting a mortgage. Mortgage Specialist Toronto have access to many different lenders and can negotiate the best rates on your behalf. They also have the industry knowledge to direct you to the right mortgage products on the market, and then support you through the application and settlement process.

How to Choose Affordable Toronto Mortgage Rates

A necessary step in finding affordable Toronto mortgage rates is to know the different types of mortgages that are available to you.

Fixed Rate Mortgage (FRM) – In a fixed rate mortgage, the interest rate and monthly payment will remain the same throughout the term of the loan even if interest rates change in the prime market. Lenders may offer a fixed interest rate for 1-year, 2-year, 3-year, 4-year and even 10-year terms. There are lenders who will also offer 15-year and 25-year terms. The most popular among borrowers is the 5-year term mortgage. Choosing a longer term will give you the security of having your mortgage payments exactly the same for the entire duration of your loan. These types of mortgages usually have the lowest rates among all other types of mortgages and are the most popular choice among borrowers in Toronto.

Variable Rate Mortgage (VRM) – Some homeowners in Toronto choose a variable rate mortgage, also known as adjustable rate mortgage (ARM), even though it can be risky because the interest rate is typically lower than that of a fixed rate mortgage and they offer more flexibility and less penalty in case you need to break the term. In a variable rate mortgage, the interest rate and monthly payments can go up or down on usually a monthly basis depending on how the interest rates are doing in the market. If interest rates go down, the borrower can save a lot of money. If interest rates go up, payments will also increase. The 5-year variable mortgage is the most popular in Canada.

50 / 50 Mortgage – This may be the right mortgage for homeowners who are unsure whether to go for a variable rate mortgage or a fixed rate mortgage. With this type of mortgage, 50% will be locked at variable interest rate and 50% will be on a 5 year fixed term. The two will be independent of each other, so you can choose to make prepayments on the fixed rate amount which has the higher interest rate, or you can pay down the portion with the variable rate substantially and take advantage of lower interest charges when rates drop, thereby minimizing any further risks of interest fluctuations.

High Ratio Mortgage – A mortgage which has less than 20% down payment is considered a high ratio mortgage. With this type of mortgage the borrower is required to purchase mortgage insurance which can be made through one of Canada’s three insurers – Genworth, CMHC or Canada Guaranty.

Open Mortgage – In an open mortgage, you have the option to make lump sum payments or pay off the whole amount of the loan without being charged a penalty. This is a good choice if you are expecting a sum of money that will allow you to pay back the full mortgage within 6 months to 1 year.

Closed Mortgage – In a closed mortgage you will be charged a lower interest rate than with an open type mortgage, but if you make large payments or pay the loan off earlier than the term of the loan then you will incur steep penalties.

In large Canadian real estate markets such as Toronto mortgage rates can be a complicated process. With rates going up and down unpredictably, it pays to do your homework and keep a close eye on the market to be able to lock in the better, lower mortgage rate.