How Many Mortgages Can I Get at the Same Time?

In Canada, you can have multiple mortgages on different properties simultaneously. There is no specific legal limit on the number of mortgages you can have. However, the number of mortgages you can obtain for a single property is generally limited to two.

How Do Mortgages Work?

To understand the limitations on multiple mortgages, it’s essential to grasp how mortgages work. A mortgage is a loan provided by a lender to finance the purchase of a property. The property itself serves as collateral for the loan. In the event of default, the lender has the right to seize and sell the property to recover their investment.

Mortgages are analyzed in terms of lien position, which determines the priority of each mortgage in the event of foreclosure. The first mortgage, also known as the first-position mortgage, holds the primary lien position. If multiple mortgages exist on a property, the second mortgage, or second-position mortgage, holds a subordinate lien position.

Why You Can’t Get More Than Two Mortgages

The reason you can’t generally obtain more than two mortgages on a single property is due to the difficulty of finding a lender willing to assume the third lien position. Banks and lenders are reluctant to take on this level of risk, as third-position mortgages are typically paid last in foreclosures, and there is a higher chance of not being paid at all.

During the financial crisis of 2008 and 2009, many second-position lenders did not receive payment in foreclosures, let alone third-position lenders. As a result, banks are hesitant to extend loans for third mortgages, and if they do, the interest rates may be prohibitively high.

In summary, while you can have multiple mortgages on different properties, the general limit for mortgages on a single property in Canada is two.

How does a First Mortgage Work?

As a first-time homeowner, obtaining a first mortgage is typically the initial step in purchasing a property. When you secure a first mortgage, your lender provides you with the funds necessary to buy the property. The specific criteria for obtaining a first mortgage vary among lenders but generally include factors such as credit score, loan-to-value ratio, down payment, and repayment plan.

The loan-to-value (LTV) ratio is an essential consideration for lenders. It represents the percentage of the property’s value that you are borrowing. For example, if you are purchasing a property worth $100,000 and have an LTV ratio of 80%, you would receive a loan of $80,000, while providing a down payment of $20,000.

Repayment of the first mortgage occurs through monthly installments over a specified period. As you make payments, your equity in the property increases. Once the loan is fully repaid, you become the sole owner of the property.

What Is a Second Mortgage and How Does It Work?

A second mortgage is a loan obtained while you still have an existing first mortgage. It allows you to tap into the equity you have built up in your property. This equity represents the difference between the current market value of your property and the outstanding balance on your first mortgage.

A second mortgage in Canada can be acquired from the same lender as your first mortgage or a different lender. The funds received from a second mortgage can be used for various purposes, such as home renovations, debt consolidation, or investments. Unlike first mortgages, there are generally no usage restrictions on second mortgages.

Similar to a first mortgage, a second mortgage involves a lien against a portion of your home equity. The lender provides you with a loan equivalent to the value of the equity you mortgaged. The requirements for obtaining a second mortgage vary among lenders, including factors such as credit score, income, debt-to-income ratio, and the amount of equity you have in the property.

Types of Second Mortgages

There are two common types of second mortgages: home equity loans and home equity lines of credit (HELOCs).

Home Equity Loan

A home equity loan in Canada provides you with a lump sum of cash equivalent to the portion of your home equity you wish to mortgage. This loan is repaid over a set period, typically through monthly installments. The interest rates for home equity loans are usually lower than those of credit cards, making them an attractive option for consolidating high-interest debts or funding home improvements.

Home Equity Line of Credit (HELOC)

A HELOC in Canada functions similarly to a credit card. Instead of receiving a lump sum, you are granted a line of credit based on a percentage of your home equity. You can draw from this line of credit as needed, and interest is only charged on the amount you borrow. HELOCs typically have a draw period, during which you can access the funds, followed by a repayment period.

How a Home Refinancing Works

Home refinancing is another option to consider if you require additional funds or want to take advantage of better interest rates. Refinancing involves replacing your existing mortgage with a new one, often with more favorable terms.

When you refinance your mortgage in Canada, you can choose to increase the loan amount to access additional funds. This is known as a cash-out refinance. The new mortgage pays off your original mortgage, and you receive the difference in cash.

Refinancing can be beneficial if you want to consolidate debts, make home improvements, or invest in other properties. However, it’s important to carefully consider the costs and potential savings associated with refinancing, such as closing costs, prepayment penalties, and the impact on your monthly payments.

The Difference Between a Second Mortgage and a Home Refinance

While both second mortgages and home refinancing involve accessing additional funds, there are key differences between the two.

A second mortgage allows you to borrow against the equity you have built in your property while maintaining your existing first mortgage. It involves receiving a separate loan with its own repayment terms and interest rates. You will have two mortgages on your property, each with its own lien position.

On the other hand, home refinancing replaces your current mortgage with a new one. This new mortgage may have a higher loan amount, allowing you to access additional funds. Unlike a second mortgage, refinancing consolidates your existing mortgage and any additional funds into a single loan. This can be beneficial if you want to take advantage of lower interest rates or adjust the terms of your mortgage.

What are the eligibility criteria for taking out a second mortgage?

The eligibility criteria for a second mortgage in Canada are similar to those for a first mortgage. Lenders will evaluate factors such as your income, employment status, credit score, and debt-to-income ratio. They want to ensure that you have the financial means to handle multiple mortgage payments.

It’s important to provide evidence of your income, including pay stubs or tax returns, and documentation of any outstanding debts or financial commitments. Your credit score will also be taken into consideration, as it reflects your creditworthiness and ability to repay loans.

Lenders will calculate your debt-to-income ratio, which compares your monthly debt payments to your gross monthly income. Generally, a lower debt-to-income ratio is preferred, as it indicates a lower risk for the lender. Aim to keep your debts, including both mortgages, below 25% of your monthly income to increase your chances of approval.

What are the Additional costs for a second mortgage?

Obtaining a second mortgage comes with additional costs that you should consider. These costs include:

• Higher Deposit:
  When purchasing a second property, lenders typically require a higher deposit compared to a first home. While first-time buyers may be able to secure a mortgage with a 5% deposit, second properties often require a deposit of at least 15%. For buy-to-let properties, the deposit can be even higher, often around 25% of the property’s value.
• Stamp Duty:
  When buying a property in Canada, you are required to pay Stamp Duty Land Tax (SDLT). The rate for second properties is higher than that for first homes. Additionally, a 3% surcharge is applied to the standard SDLT rate for second properties. It’s important to factor in these additional costs when budgeting for a second mortgage.

How to Improve your chances of getting a second mortgage

While obtaining a second mortgage may come with additional requirements, there are steps you can take to improve your chances of approval:

• Pay off High-Interest Debts:
  Prioritize paying off any high-interest debts, such as credit cards or personal loans. Lenders consider these debts riskier and may view them unfavorably when evaluating your mortgage application.
• Boost Your Credit Score:
  Take steps to improve your credit score by making timely payments, reducing credit card balances, and avoiding new credit applications. A higher credit score demonstrates your financial responsibility and increases your chances of obtaining favorable mortgage terms.
• Save for a Larger Deposit:
  Saving for a larger deposit can help reduce the loan-to-value ratio, making you a more attractive borrower. Lenders often offer better terms and interest rates to borrowers with a lower loan-to-value ratio.
• Seek Professional Advice:
  Working with a professional mortgage broker in Canada can help you navigate the complexities of obtaining a second mortgage. A broker can provide guidance, access multiple lenders, and help you find the best mortgage options based on your financial situation and goals.

Can you have two mortgages on one property?

It is possible to have two mortgages on one property. This is often referred to as a second charge mortgage. In this scenario, you are borrowing against the equity you have already paid off on your primary mortgage. A second mortgage allows you to access these funds for various purposes, such as home repairs, financing other projects, or consolidating debts.

A second mortgage differs from refinancing, where you replace your current mortgage with a new one. With a second charge mortgage, you retain your existing mortgage and take on a separate loan against the equity in your property.

It’s important to carefully consider whether a second mortgage is the best option for your financial situation. Increasing your mortgage debt comes with the risk of losing your home if you are unable to meet the repayment obligations. If you require a smaller loan amount, alternatives such as personal loans or lines of credit may be more suitable.

In Canada, it is possible to have multiple mortgages on different properties simultaneously. However, the number of mortgages you can obtain for a single property is generally limited to two. Understanding the regulations and eligibility criteria for second mortgages is crucial when considering real estate investments or accessing funds for various purposes.

By carefully evaluating your financial situation, improving your credit score, and working with experienced professionals mortgage brokers in Canada, you can increase your chances of obtaining a second mortgage. Whether you choose a second mortgage, home refinancing, or other financing options, it’s essential to weigh the costs, benefits, and risks associated with each decision.

If you have further questions or need assistance with your mortgages in Canada, reach out to SaiCharanKallu SubMortgages Broker at Citadel Mortgages, your trusted mortgage broker. We have the expertise and resources to guide you through the mortgage process and help you make informed decisions. Contact us today to explore your options and achieve your real estate goals.

Sources: citadelmortgages.ca

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What is the home buyers’ plan?

The home buyers’ plan is a useful method for raising the money for a down payment on a home. It allows individuals the opportunity to take up to $35,000 out of their RRSP and put it towards the purchase of a qualifying home. For the most part, common home types, such as houses, condos, and duplexes, all qualify for this plan. The ability to deduct the $35,000 is per individual, so if you are looking to purchase the property with your spouse, you can each deduct $35,000 for a combined total of $70,000. Even in a hot housing market like Toronto, $70,000 is still close to 10 per cent down for the average home.

The withdrawal made from the RRSP is “tax-free” in the sense that it does not count as a distribution. Instead, you must make after-tax contributions back to your RRSP in the amount of the loan over 15 years. As an example, if you withdraw $35,000 from your retirement plan, you must pay $3,000 back each year. You will not get a tax credit for the amount that you pay back each year under the program. Therefore, the home buyers’ plan is effectively an interest-free loan for your down payment from your retirement fund.

Taking advantage of this program is incredibly beneficial when you have some of the down payment saved, but need a little bit more to get you to the 20 per cent. With under 20 per cent down, banks will often require some mortgage insurance. This insurance can carry a fairly steep price. Putting less than 20 per cent down can often subject you to higher interest rates as well.

Let’s suppose you find a Toronto condo for $500,000 that you love. Furthermore, let’s assume you have $70,000 (14 per cent) saved. Based on this down payment, your mortgage insurance rate would be 3.1 per cent or $13,330 amortized over the life of the loan. That’s a hefty price to pay for being $30,000 short of 20 per cent down. With the home buyers’ plan, you could withdraw that $30,000 from your RRSP. This cash infusion would mean you would have the full 20 per cent down and have to pay no mortgage insurance. By taking an interest-free loan of money in your retirement account, you save over $13,000 in this example.

Do I qualify for this plan?

For most people, participating in the home buyers’ plan makes logical sense. It provides would-be homeowners with the ability to save money on mortgage insurance and lower their interest rates. While this program is reasonably widely available, there are a few restrictions on who can participate.

You can participate in this plan only if you are a first-time homebuyer. The term “first-time” is unfortunately quite misleading. Many people qualify for this plan even though they may not consider themselves first-time buyers. You are a first-time buyer if “in the [previous] four year period, you did not occupy a home that you or your current spouse or common-law partner owned.” Also, the Government of Canada changed the rules so that, starting in 2020, first-time buyers include anyone who recently experienced a divorce or dissolution of a common-law relationship. Sadly, many people read the term “first-time” and assume they don’t qualify since they owned a house in the past. The reality is that many would-be homeowners are eligible for this plan.

Additionally, you must also intend on occupying the house as your principal residence. If you are looking to use the funds from your RRSP to finance the down payment for an investment property, this plan will not allow you to do that. You must be looking at making the home your principal residence within one year of making the purchase. With that said, the rules do not state how long you must occupy the house before you could move and rent it out. Moving within a year or two after purchasing the home would likely raise red flags. The withdrawals from your RRSP are meant only to buy a house in which you intend to dwell.

Finally, you can use the home buyers’ plan to buy a home for a related person with a disability. If you have loved ones who have had injuries or suffered medical difficulties, you can borrow the funds from your RRSP to help them purchase a home.

Are there any drawbacks?

Intuitively, this plan sounds great to most people. It provides first-time homebuyers with the opportunity to raise funds for a down payment. Couples can combine the $35,000 limits and use their RRSPs for a substantial amount of their down payment. Single homebuyers can still use the $35,000 to top up their savings and get closer to the coveted 20 per cent down. No plan is perfect, however. There are a couple of things to keep in mind before electing to participate in the program.

The most significant drawback is that you are borrowing against your RRSP with an obligation to pay the money back over 15 years. As long as you can make those payments, there are no problems. However, if you cannot make the payments, they are treated as a taxable distribution from your RRSP. Missing payments could result in tax bills at the end of the year that would exceed what you would have paid in interest if it were a conventional loan. If you think you may have difficulty making both the mortgage payments and RRSP contributions, the home buyers’ plan may not be right for you.

Another more subtle drawback is that while the money is technically interest-free, you will not be earning any investment income from that money either. When the RRSP money leaves your account, it isn’t generating dividends or capital appreciation for your retirement. If the market goes down, the withdrawal might have wound up saving you money! However, if the market skyrockets, that $35,000 or less of your retirement portfolio won’t be going up. If you expect the market to do incredibly well, you may wish to think twice about making the withdrawal.

It is worth noting that there are no pre-payment penalties under the plan. If you use the $35,000 to close on the house and put the money back a year later, you are free to do so. In theory, you could even use the cash to close on the house with a lower interest rate and no mortgage insurance, pay the mortgage down a bit, and then use a home equity line of credit to restore your retirement funds. There are a lot of possibilities to make your RRSP whole again!

This plan sounds great! How do I get started?

If you want to participate in this plan, the good news is that the process is quick and easy. All you need to do is fill out form T-1036. This PDF is a standard CRA form that asks a few qualifying questions to ensure you are eligible for the plan. It then asks for some personal information and how much you are requesting. You would then take T-1036 and give it to the institution with which you have your RRSP. They will process the withdrawal for you per your written instructions. It’s that simple!

While getting the distribution is quite simple, it is worth discussing all your options with a mortgage broker, like Citadel Mortgages. While the home buyers’ plan often makes sense, you can usually have more peace of mind if a qualified professional reviews your financial situation. The home buyers’ plan is simply one tool that is available to get you into the home you want. We can see if other programs, such as the first-time homebuyer incentive or the newcomers to Canada mortgage, would also be of assistance. The Government of Canada has quite a few different avenues to help Canadians purchase the homes of their dreams!

The home buyers’ plan: A summary

As a recap, the home buyers’ plan is a program that allows would-be homeowners to withdraw up to $35,000 from their RRSP. This limit is on an individual basis so couples can take a total of $70,000 from their combined RRSPs. The average home price within the Toronto area is approximately $800,000. Couples who may have a few years of savings in their RRSPs can use that money to provide just under 10 per cent of the total down payment. When combined with savings, the home buyers’ plan can sometimes enable couples to avoid paying mortgage insurance.

To participate in the plan, you must be a first-time homebuyer. The term is misleading. First-time does not mean that you have never owned a home before. Instead, it means that you have not lived in a home you own for the past four years. If you owned a house 10 years ago, sold it, and have rented for the past 10 years, you would be considered a “first-time” homebuyer under the plan. Starting in 2020, anyone who gets divorced or has a common-law relationship fall apart will be a first-time homebuyer under the program. This rule change makes the home buyers’ plan a powerful tool for recent divorcees to get back on their feet following a tough time.

While the money taken from the plan is both interest and tax-free, you must repay this loan over 15 years. The required payments are split up into 15 equal amounts over those years. For example, if you withdraw $35,000, you must pay back $3,000 each year. You will not get a tax credit for the amount that you put back. Failing to pay the full amount in a calendar year will result in the amount being considered a taxable withdrawal.

The home buyers’ plan is a powerful financial program. When used correctly, it can open up so many doors for people to own property. Couples who would otherwise be looking at hefty mortgage insurance premiums can use the program to avoid those altogether. Single buyers who may not have quite enough saved up for 20 per cent down can use the program to put them over the 20 per cent mark and qualify for the loan. There are many exceptional use cases for this program. Anyone who is looking at purchasing a property should at least explore if the program is right for them.

As always, consult with your mortgage broker to see all the options that are available to you. They may be able to suggest how to combine this plan with other available incentives. Recent immigrants to Canada who have high-paying jobs may be able to use this plan to provide the necessary 5 per cent down for the newcomers to Canada mortgage program. You may be able to use this plan in combination with the first-time homebuyer incentive to obtain enough down that a lender will fund your mortgage.

If you are in the market and would like to learn more about the home buyers’ plan, please feel free to contact us! We can also explain the details of the other government incentives mentioned in this post. We can help analyze your particular situation and ensure you get the approval you deserve. With multiple lenders and government programs available, homeownership is something that we can help all Torontonians achieve!

By using a mortgage agent Sai Charan Kallu SubMortgage Broker or mortgage broker from Citadel Mortgages, you will be able to ask all the questions you have and be ensured you get the best advice and mortgage product for your mortgage needs. Contact us here at Citadel Mortgages to become mortgage-free sooner!

Want to learn more? Call us toll-free at (866) 600-8762.  Learn more today.

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This story was provided by Citadel Mortgages for commercial purposes.

Sources: ottawacitizen.com, citadelmortgages.ca

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