PEOPLE who have a significant amount of equity in their primary residence can tap into it, to get funds to purchase another one, or for any other purpose. This can be achieved through a home equity loan, said Petal James, chief of branches at JN Bank.

Home equity is the difference between the market value of the property and the amount owed to the mortgage lender. As one makes mortgage payments and reduces the balance on their loan, they build equity.

James explained that at JN Bank individuals, including seniors between 60 and 70 years old, can borrow up to 85 per cent of the value of their home.

“They can then use that money for any purpose they desire, including buying a second home, paying medical expenses or conducting renovations on their current property,” she said.

“With a home equity loan, you can receive that money with a lump sum payment that is then paid back in fixed instalments overtime.”

Home equity loans are usually fixed-rate loans so the interest rate remains the same throughout the term of the loan.

Here are a few points to consider when using a second mortgage to buy another house:

Decide how much you want to borrow

Before taking equity out of your home to buy another house, decide how much you want and need. Home equity loans limit how much you can borrow. In most cases, you can only access up to a specific percentage of the equity in your home. For example, if your home is worth $35 million and you owe $15 million, you have $20 million in equity. In this example, the maximum you could borrow is $17 million.

Shop around

When taking out a home equity loan for a second home, you can use any lender. The loan does not have to be with your current bank or mortgage company, so the best way to get a competitive interest rate is to shop around and get quotes from multiple lenders. However, if the second loan will be maintained at another institution, then the first mortgagee or lender must give consent. As you compare, look at the interest rate, loan terms, fees and estimated closing costs.

* Pay attention to your unique situation

Your approval for a home equity loan will depend on multiple factors. The value in your home will determine the maximum amount of equity available, and your financial information will determine how much of that equity you can borrow. In addition, your lender will look at your credit score, income, other outstanding debts and additional information.

James further pointed out that using a home equity loan to buy another house is not without risks, so it’s smart to understand the pros and cons before proceeding.

Here are a few things to consider:

Pros

You’ll reserve your cash flow. Using home equity to buy a second home keeps cash in your pocket that you would otherwise use for the home purchase. This increased cash flow can result in a healthier emergency fund or go towards other investments

You’ll increase your borrowing power. Buying a house with equity will allow you to make a larger down payment or even cover the entire cost — making you the equivalent of a cash buyer

Home equity loans are usually more affordable (in terms of interest rates and repayment period) than other loans, for example, an unsecured loan

Cons

You’ll put your primary residence at risk. Using a home equity loan to buy a new house can jeopardise your primary home if you’re unable to handle the payments.

You’ll have multiple loan payments. Taking equity out of your home to buy another house means you’ll potentially have three loans if you have a mortgage on both your primary residence and the second home, in addition to the home equity loan.