Friday, 12 March 2021
By Leahs Mortgages
Elan Weintraub Quoted in the Globe and Mail – Thinking about buying a second property? Here’s how to finance it
“The goal is to unlock the equity in your home,” says Elan Weintraub, co-founder and mortgage broker at Mortgageoutlet.ca.
There are many issues and strategies to consider with this kind of financing, Mr. Weintraub says, depending on your real estate status and objectives.
Ways to finance a second property
Often the best option is to refinance your current mortgage. This loan, called the “first-position charge on the title,” is likely to come at the lowest rate, so it’s the best way to free up funds from the equity in your current property, Mr. Weintraub says.
If that’s not possible or advantageous due to fees, rates or terms, you can use the equity in your home as security against another loan, which becomes a “second-position charge on the title.” A popular option for this is through a home equity line of credit, or HELOC, a loan offered by a bank, credit union or other lender that’s secured by the value of your home, so it comes at a relatively low rate, Mr. Weintraub says.
Depending on your credit and income, the interest on a HELOC may be just half a per cent above prime. This rate is typically slightly higher than a first mortgage, reflecting the added risk to the lender of being paid second if you default.
There are also “second mortgages” offered by private lenders, he notes, which are typically used to consolidate debt if the borrower has suffered a job loss or credit problems. These come at a higher rate, even into the double digits, given the greater risk involved.
Mr. Weintraub says using funds from a HELOC makes the most sense when buying land, rustic cottages or foreign places, which can all be difficult to finance. “If you add a HELOC to your existing property, you can write a cheque for the new place,” he says.
Seek advice for a second home purchase
Taking an additional mortgage is a big decision for many Canadians. Mr. Weintraub suggests homeowners discuss their goals and options with their current lender and seek a second opinion from a mortgage broker. Also, get some financial planning, legal and accounting advice. For example, if you borrow funds for a property that generates income, you may get a tax benefit on the interest you pay.
It’s also possible to customize second mortgages, Mr. Weintraub says, such as when parents gift or loan funds to help their children buy a home when they get married. Rather than simply write a cheque, the amount can come as a second charge on the property, which he calls an interest-free “mom and dad second mortgage.” This allows the parents to protect the money if the marriage breaks down or even to recoup their funds when the home is sold.
