There are almost 10 million homeowners in Canada. If you’re one of them, you probably know your home is your biggest asset. Many people believe they need to sell their homes to access the funds they have invested in their homes.
This isn’t necessarily true. Canadian homeowners can unlock their home equity with a second mortgage.
Wondering if you qualify for a second mortgage and how much you could receive? A second mortgage calculator can help you do everything from discovering the cost of the loan to determining your monthly payments.
A second mortgage is a loan that gives Canadian homeowners access to the equity in their homes. Instead of needing to liquidate the asset, homeowners get the funds they need by “unlocking” the value of their home.
This type of loan is sometimes known as a home equity line of credit or HELOC. HELOCs are a little bit different than second mortgages. Both offer access to the equity in your home.
The difference is the type of credit extended by the lender. A second mortgage is like a traditional mortgage or installment loan. You’ll receive the funds in a lump sum, then pay them back over a set period of time.
HELOCs are revolving credit loans. That means they work more like credit cards. You’ll make payments on the outstanding balance, but the funds will be available for you to use again.
Before you get a home equity loan, it helps to understand what equity is and how much you have in your home. So, how do you figure out how much you have?
Equity is the difference between the current market value of your property and any outstanding loans on the property. This includes liens and mortgages.
Suppose your home has a current market value of $1 million. Now imagine you owe about $400,000 on your mortgage. There are no other liens or loans on the property.
Your equity in this property is $600,000. Lenders must factor in the outstanding debt in total loan value. They will go up to 90 percent of the property value.
In this example, your second mortgage could give you up to $500,000 in liquid funds.
If you owned the $1 million property outright, then you may qualify for up to $900,000.
Doing the Math
These calculations can be broken down to show exactly how lenders arrive at them:
Once you know the highest possible total loan amount that can be placed on the property, you can subtract any outstanding loan amounts. This will tell you how much you could get on a second mortgage:
The maximum second mortgage for this property is $500,000. What about the case of the homeowner who already owns the property outright?
The highest loan amount will not change, even if the homeowner has no debt against the property.
A common question from Canadian homeowners is why they should get a second mortgage. As noted, your home is your biggest asset. That means you have funds invested here.
The problem is usually that homeowners can’t access those funds unless they sell the house. With a home equity line, you can get access to those funds. In the example, the homeowner was eligible for half a million dollars.
That’s one of the biggest benefits of a second mortgage. A bank is unlikely to extend a loan that large unless it’s a mortgage. If you still have a mortgage on the property, though, they probably won’t want to give you that much.
Even private lenders may not want to give out a loan that big. The home equity loan is different because it’s secured by the property. The lender feels safer giving out this much loan because they know they can get it back through sale of the house.
That means even Canadian homeowners with bad credit or no income may be eligible. A bad credit second mortgage often has lower rates than other types of loans as well.
There are many reasons Canadian homeowners take out second mortgages. These include:
It’s clear a second mortgage is a flexible tool for Canadian homeowners. Many homeowners only use a portion of the total loan approval. They may use this to fund a renovation or necessary repairs.
Others access their home equity to keep themselves afloat during a tough time. This may be the case for more Canadians in the current environment, as they wait for the job market to rebound.
Debt consolidation with a second mortgage is another popular use. Since the interest rate is usually lower on a second mortgage, it can make payments easier to manage. It can also help Canadian homeowners get rid of bad debts and rebuild their credit.
The loan term may also be longer. That can make the monthly payment more manageable for homeowners.
If you’re curious about a second mortgage, then a second mortgage calculator is the best tool available. It can help you look at every aspect of a second mortgage.
The most common use is to calculate the second mortgage value. Most homeowners want to know just how much loan they could get.
Most second mortgage calculators use a simple formula to determine how much loan you could get. This is:
Lenders offer based on what’s known as LTV. “LTV” stands for loan to value, and it’s expressed as a percentage. This is a calculation of the total loans registered on the property.
Examples of LTV Calculation
Go back to the $1 million property example. The existing debts are $400,000. The property’s current LTV is 40 percent, as the debts represent 40 percent of the property value.
Most lenders will not go above 90 percent LTV with a second mortgage. That means the total value of all debts against this property could not be more than $900,000.
If the current debts are $400,000, then the property owner would qualify for no more than $500,000 on a second mortgage.
A calculation makes this clear:
Since the LTV represents total loan amounts, the new second mortgage has to be added to the outstanding debts.
Other common LTV rates are 80 and 70 percent. Here’s what they look like for this $1 million property.
At 80 percent LTV, the homeowner could qualify for an extra $400,000 on a second mortgage.
At 70 percent, the homeowner could still get up to $300,000.
Now that you understand how a second mortgage calculator in Canada works, you know you’ll need to plug in some numbers.
You can use an estimate of your home’s market value. If you’ve had your home appraised recently, use that number. You can also estimate current value based on recent listings for similar properties in your area.
Outstanding debts include your mortgage balance and liens. If you have used your home as collateral to secure other loans, such as a line of credit, add these as well.
The second mortgage calculator can do more than tell Canadian homeowners how much of a loan they qualify for. You can also use it to get a look at monthly payments, interest rates, and more.
To determine the second mortgage payment, you’ll need to find the interest rate. You’ll also need to know the loan term length.
Second mortgages usually have very short terms. The most common are 3, 6, and 12 months. Other terms are possible, including terms as short as one month.
A second mortgage calculator will use a 12-month term by default. The calculator will also calculate the interest rate for you.
Second mortgage interest rates can be difficult to determine, except for when the mortgage lender tells you what they are. Unless you’ve applied for a loan, then you may not know what interest rate to expect.
That’s because second mortgage interest rates are tied to your loan to value. As a result, you need to know your LTV to determine the interest rate.
Remember, LTV is the total debt against the property. You can calculate it by adding existing debts to the new second mortgage amount. It’s usually expressed as a percentage of the total value of the property.
Once you know LTV, you can calculate second mortgage rates. You’ll want to be sure you use a calculator specific to your province.
That’s because interest rates vary between provinces. A second mortgage calculator for Ontario will use a range of about 6 percent up to almost 14 percent, based on LTV.
How do interest rates vary with LTVs? You can see in this helpful breakdown of ranges:
Sometimes, you want to know the cost of borrowing. In this case, you might want an interest-only second mortgage calculator.
This calculation lets you see the total interest you’ll pay on the mortgage. This can help you weigh the cost of borrowing against other credit products.
To calculate interest only, you’ll need to take the value of the loan and multiply it by the interest rate. That’s the total interest for one year.
Divide this over 12 months to determine the monthly payment for the interest-only second mortgage. Since most loans are on a one-year term, this would be the monthly payment for the entire term of the loan.
Most lenders set interest-only payments for the length of the second mortgage. This means the monthly payment you see is equal to the interest alone.
Interest-only payments can help both lenders and borrowers. By offering interest-only payments, lenders reduce the risk of default. In turn, your monthly payment is much lower and more manageable.
So, how do you pay back the principal? In most cases, the principal is due at the end of the loan term. Depending on the lender, refinancing may be an option.
There is an option to make payments that include both principal and interest. This is much more like a traditional mortgage in that sense. When lenders offer this option, the loan amount will be amortized over 20 or 25 years, just like a traditional mortgage.
It is possible to pre-pay interest. You’ll get less in cash upfront, but you can back the principal faster.
A 2nd mortgage calculator is an incredibly helpful tool for Canadian homeowners who want to see how much of their home’s equity they can unlock. The calculator can help you do everything from estimate payments to discover interest rates.
Are you ready to unlock the equity in your home? Get in touch with a mortgage broker and discover what a second mortgage could do for you.
Low second mortgage interest rates from direct second mortgage lenderes.
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Equity based second mortgage approvals for homeowners.
Getting a second mortgage in Canada is simple and fast. There are no income or credit requirements. Homeowners are approved based on their home equity.
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