Can You Really Have 2 Mortgages? Key Answers for Homeowners & Investors

Why have two mortgages

Having two mortgages is serious news for most people in Toronto. We have people get a second mortgage for a couple of major reasons. The easiest way is to purchase a second home. Maybe it’s a rental or cottage or investment home.

With Toronto’s market, having a second property can diversify risk and enhance returns over time. For instance, one client purchased a downtown condo as a rental. The rent nearly pays the mortgage, as the value keeps going up.

Another motivation is to leverage the equity developed in a primary residence. Home values in Toronto have increased significantly over the last decade. A second mortgage allows us to access that value.

We could use the cash for a lot of things, like big home upgrades or a kid’s college. One family we worked with took a second mortgage to complete their basement, putting in a rental suite. This not only boosted their property value, but generated additional income every month.

Debt consolidation is another major player. Most GTA residents have high-interest debt – credit cards, car loans, lines of credit. A second mortgage can roll all those debts into one payment at a much lower rate.

It can make monthly bills more manageable and save you a ton on interest. We’ve had clients save hundreds per month by doing this, and it often bolsters credit scores in the process.

Naturally, some tax angles to consider. Certain expenses associated with a second mortgage are tax-deductible, particularly if the home is utilized to generate income.

Here’s a quick look at some tax points for having two mortgages in Canada:

You can’t hide the risks. Two mortgages means larger monthly payments and more to keep track of. Lenders typically charge higher rates on the second loan, as they assume more risk.

If you default, you could lose your home. Owning a second property you don’t even live in means more stringent regulations – larger down payments, more rigorous lending verifications.

We always tell clients: check your budget, plan for rates to rise, and make sure you have a backup plan.

How to qualify for a second mortgage

Getting a Second Mortgage Toronto means more steps than your first. Lenders set the bar high. We have to prove we satisfy each requirement, from credit score to home equity. The path is obvious but it isn’t always simple. Here’s the biggest factors we assist our clients in examining.

Number one – credit score. Most lenders will want to see at least 680. Some private lenders will go lower but the rate jumps. Over 680 we can locate better rates and more choices. Under that, and rates can exceed 10%. It’s worth handling credit prior to application.

Then, we look at home equity. Lenders employ the loan-to-value (LTV) ratio. With a second mortgage, the LTV can be as high as 80% of your home’s appraised value less the remaining balance on your first mortgage. For instance, if our home is valued at $500,000 and we owe $300,000, we can borrow up to $100,000. The more equity you have, the more leverage and better terms you can usually get.

Debt ratios are important. We assist in determining GDS and TDS ratios. They want GDS under 39% and TDS under 44%. That means all monthly debts – including the new mortgage – can’t consume more than these percentages of our gross income. If we’re over, we may need to trim debts or increase income.

Lenders conduct a stress test. We have to demonstrate we can pay at 5.25% or the contract rate +2%, whichever is greater. This test eliminates people who might struggle if rates increase. Not simple, but it saves us.

Here’s how we qualify:

1. Check credit score: Aim for 680+, fix any errors, pay off small debts to boost the score.
2. Review home equity: Get the home appraised, check how much is left on the first mortgage.
3. Calculate debt ratios: Combine all monthly payments. Ensure GDS and TDS comply with lender guidelines.
4. Pass the stress test: Use income, job letters, and tax returns to show we can pay more if rates jump.
5. Shop lenders: Compare terms. Some have interest-only or short (1 year) terms, others have terms up to 25 years. Others begin at $1,000, while some require higher minimums.

Second mortgages carry higher rates. We ensure clients understand the conditions – interest-only choices, repayment duration and overall expenses. Even if credit isn’t perfect, there are options, but rates will be higher.

The financial impact

Taking on two mortgages in Toronto means our overall debt load increases. Lenders look at our DTI to determine if we can afford two payments simultaneously. If our DTI creeps above 44%, almost all lenders will reject us for additional credit. Two mortgages will eat into our future borrow capacity too – whether it’s for a third property, a car loan, or even new credit cards.

Here’s a quick look at how the numbers stack up:

Having a second mortgage can help us cover large bills. We could spend the difference on a kid’s tuition, a new vehicle or a down payment on a different real estate purchase. Occasionally, it’s smart to leverage a second mortgage to eliminate other debts with scarier interest rates – hello credit cards and payday loans.

This maneuver can reduce our aggregate monthly obligations and cash for other stuff. Second mortgages almost always have higher rates than the first one. Lenders consider them riskier, so we end up paying more – every month and over the life of the loan.

We have to look out for over-leverage. If we over-borrow, a minor fluctuation in our income or the housing market can leave us stranded. Defaulting on either mortgage jeopardizes both properties. Here in Toronto, where prices soar, even a modest decline in value can put us underwater – particularly if we leveraged up to buy that second place.

The upside is that having two houses can increase our wealth if home prices rise. Updating or refreshing a second property can increase its value, providing us more equity and potentially a higher return if we sell. These gains aren’t guaranteed.

We need to budget for add-on expenses such as property taxes, insurance and maintenance. Since we’d own two properties, we’d need additional cash up-front, particularly for a non-owner-occupied home. Lenders typically require a minimum of 20% down, which affects our savings.

Navigating the tax landscape

Two mortgages in Toronto have special tax rules and money questions. We have to see the whole picture, to be certain we don’t overlook any expenses or opportunities to conserve. Here is a quick list of what we face with two homes:

• Mortgage interest on a principal residence is not tax-deductible in Canada, but rental property interest can be deducted if the property generates income.
• You’ll have to pay property taxes for each home, which can increase at a rapid rate if both properties are in Toronto or the GTA.
• If we flip a second home and make a profit, capital gains taxes will undoubtedly come into play. The Family home exemption just applies to 1 home.
• Rental income from a second property is taxable, and we have to report every penny earned each year.
• Joint mortgages bring added layers: sharing payments, legal duties, and what happens if one person cannot pay or passes away.

Each property has its own property tax bill. In Toronto, rates and fees vary by neighborhood, school board and property type. If both of our homes are in the city, we pay two full sets of taxes. If you’re a rental, the city can charge you more. It accumulates, thus we have to plan for these expenses in addition to our mortgage.

A sale of a second home or cottage can spark a capital gain. For exemption, you can designate only one home as a principal residence per year. Any appreciation on the second property is taxed at half the gain, at our marginal top rate. If the home appreciates a lot in value, that tax bill can sting. Let’s just make sure we keep good records of purchase prices, upgrades and sale costs.

If we rent out the second home, all rental income is taxable, less eligible expenses such as mortgage interest, property taxes, insurance and repairs. The CRA does have some clear rules, and we’re required to file a detailed statement every tax season. Failing to disclose rental income can carry heavy penalties.

Joint mortgages are all the rage in Toronto, particularly where prices are elevated. With multiple borrowers, lenders consider our combined income, so we could potentially qualify for a larger loan. If one of us can’t pay, the other has to pick up the slack.

In joint tenancy, if one of you dies, the home goes to the survivor automatically. It’s wise to have a co-ownership agreement so everyone knows their portion, payment responsibilities, and what occurs in the event of a breakup or death.

The lifestyle math of two mortgages

Two mortgages in Toronto isn’t just about approval. It’s real math and real life. Every dollar matters, and the figures can fluctuate significantly between what’s on paper and what you really cough up and live with.

When considering two mortgages, there are several key financial factors to keep in mind:

• Monthly payments for each mortgage, including principal and interest
• Utility bills, insurance, and property taxes for both homes
• Maintenance and repair costs – which can pop up at any moment
• Condo fees or homeowner association dues, if they apply
• Vacancy risk if one property is a rental
• Higher interest rates and lender fees on second mortgages
• Earnings that can support both mortgages over time
• The worth of your home equity and your borrowing capacity
• Legal, appraisal, and closing costs for each property

When we assist clients, we begin with the monthly cost. For instance, a $100,000 line of credit on a second home could mean payments as low as $275 during the draw period. That’s only the beginning.

Second mortgages cost lenders more because they’re riskier. That means higher rates – often significantly higher than your first mortgage. Throw in legal fees, appraisal fees and even home inspections and those numbers add up quick.

Steady paycheck is the answer. If there’s a possibility your job may fluctuate or you’re self-employed and income ebbs and flows, it’s wise to maintain a buffer. We recommend a minimum of 3 to 6 months expenses saved. That way, if things get tight, you’re not scrounging to hold on to both homes.

Rental properties present challenges upon challenges. If you’re relying on rent to help mortgage the mortgage, budget for at least a month or 2 a year where you may not have someone living there.

That is, you’ll require additional funds to pay for two mortgages until you occupy a new tenant. If that second place is for enjoyment, say a cottage up north or a downtown condo, you’ve got to balance whether the additional expense aligns with your lifestyle and objectives.

Is it worth it for fantastic weekends away or an improved work-life balance?

Second mortgages tap your home’s equity. Say your Toronto house is worth $1.2 million and you owe $700,000, you could borrow up to 80% of its value. Each lender makes up their own rules.

It’s worth it to shop around, because combining two mortgages can become tricky. We do, however, always recommend talking to a few lenders to get the best terms.

Alternatives to a second mortgage

When planning for a second property or looking to tap into home equity, it pays to know what other options are out there. In Toronto, the mortgage landscape gives us a range of choices that can fit different needs and risk levels. Instead of taking on a second mortgage, here’s what we often weigh with our clients:

• Home equity line of credit (HELOC)
• Home equity loan
• Mortgage refinancing
• Reverse mortgage
• Conventional mortgage for a new property
• Private lender solutions
• Credit union mortgage products
• Joint mortgage or partnership

A HELOC is among the most popular options here. This loan allows us to borrow up to 80% of our home’s value, less the amount owed on our first mortgage. The funds function in a manner similar to a credit card, allowing us to access what is necessary and incur interest only on our utilization. It’s convenient and typically has lower rates than second mortgages.

For lump sum lovers, a home equity loan adds up. The bank provides us with a lump sum, and we repay it in consistent payments. Not like a HELOC, it’s a one-time deal but the rates can sometimes be a little higher. Refinancing our existing mortgage is another alternative. We can re-finance our loan and get a new one, usually cheaper, or a larger amount to extract additional cash.

This shift can keep us from managing the chaos of two payments and streamline our finances. If you are a homeowner over 55 in Ontario, a reverse mortgage is possible. It enables us to tap up to 55% of our home’s appraised value, with no payments due until we sell or move out. It’s a specialized product, but it can be a life saver for fixed income folks.

If we’re talking a new property, going for a traditional mortgage rather than double-mortgage the same property can be a neater option. Partnerships or joint mortgages with family or friends are worth considering, too – spreading the cost makes qualifying easier and can open doors to better rates.

Private lenders and credit unions have even more flexible terms and sometimes lower rates than big banks, especially if our credit history isn’t spotless. After all, when it comes to handling more than one mortgage, it can get complicated. It’s savvy to step back, revisit our objectives, do the math and discuss all possibilities before taking on additional debt.