How property values in Canada tripled in just a little over a decade is nothing short of remarkable. A $1M home just 10 years ago is easily worth $2 to $3 now, giving homeowners quite a substantial bit of equity on their homes.
Homeowners may want to tap into that equity by means of a second mortgage and understandably so. Sending a child to college or upgrading a home isn’t cheap, but will tapping into your home’s equity be worth the hassle of getting a second mortgage? Will it be really better than borrowing from banks or relatives?
Second mortgages usually come with a higher interest rate compared to the less risky first mortgage. Interest rates can range from a manageable 6% up to the highest legal limit of a whopping 29.9%, with lower interest rates usually given to those with a good deal of equity in their home accompanied by a good credit score.
There are truly many considerations that you will have to think of before getting a second mortgage, including the broker fees, how much you want to borrow, and whether you can cover the interest rate with no issue. The following are the important questions to ask yourself if you’re still trying to decide whether a second mortgage is something you’d want.
Is a lawyer needed? How much will a typical lawyer’s fee be?
If you want all your bases covered, it would be in your best interest to hire a lawyer to go over your mortgage documents and explain to you the mortgage terms that you’re getting yourself into.
Stay away from a mortgage broker who advises against having a lawyer to save money, as this will often cost you more in the long run. Expect to pay about $2,000 in legal fees and think of it as a safety measure.
What broker fees should you be expecting?
There is no specific figure for broker fees but it would be reasonable to expect that it will at between 5% to 15% of the value of your second mortgage. The typical rule is that the more you borrow, the lower the broker’s fee will be in terms of percentage. Higher broker fees can be expected if there are legal issues such as foreclosure or marriage separation to contend with.
Will you be able to pay off the mortgage without penalties?
Note that most brokers will charge a 3 months’ worth of interest for late or early mortgage repayment. Ask about this before you sign anything, more so that there will usually be specific penalties for certain things such as defaulting on your payment.
Will an appraisal be needed?
Although most lenders will require an appraisal, there will be some who would want to personally inspect your property. A personal inspection will save you some money but if a lender requires you to have a professional appraisal done, you can find a list of Certified Registered Appraisers at www.aicanada.ca.
Do you REALLY want to get a second mortgage?
Note that the total fees for a second mortgage will usually be at a minimum of $4,000 excluding any interest that you’ll have to pay as well. In some cases, such as when you only need a few thousand in cash, a second mortgage may not be the best financial solution for you.
Be sure to talk to the broker and ask questions. Ask about a specific lender’s rules, and any other concern you may have. Think long and hard about being able to pay off the second mortgage before getting one. Better yet, make sure that you get the help of a professional mortgage broker who’s not looking to take advantage of you.