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I currently own and occupy a condo with ~75% LTV. My fiancé and I are planning to move to another city and buy a home in 5-7 years. We plan to put 20% down on that home, which will be a significant amount of cash for us.

Between now and then, we have a significant amount of free cash flow. I'm risk-averse enough that I'm not willing to take on any investments for this cash beyond a risk-free savings account. Therefore, I could get a better rate of return from paying down our current mortgage (no penalties). I'd like to do that, but I want to make sure we can still swing the down payment in five years.

Is it possible to use a second mortgage on my current home to make the down payment on my next one? I wouldn't go beyond 80% LTV on the current home. I have a vague recollection of signing a statement when closing my first home that asserts I didn't borrow the money for the down payment. Wouldn't that preclude me from using a second mortgage in this way? But then, why does the bank treat these two paths differently, even though they're the same for my net worth and ability to pay?

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  • @DilipSarwate if I were to take out the second mortgage today, five years before I apply for the mortgage on the new property, would that still count as borrowing the down payment? Is there some kind of window, like 1 year, that they consider the borrowing to have been for the down payment?
    – wolak
    Jul 20, 2015 at 0:19

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You did borrow money for the downpayment.

When you apply for a mortgage loan on your new home, you will be required to list all your assets and all your liabilities. You must disclose the first mortgage as well as the second mortgage on your current condo as well as the monthly payment on each of these loans. If you took out the second mortgage five years ago, you can truthfully say that you have not taken out any loans within the past year to get cash for the down payment when you apply for a mortgage for purchasing your new house. But, what the lender will be looking at is:

Can the applicants' current income support monthly payments of $1000 for the first mortgage on the condo plus $300 for the second mortgage on the condo plus $1500 for the proposed mortgage on the new house?

You might argue that you will be selling that condo soon, or will be renting it out and that the rental income will cover the mortgage payments on the condo, but will the lender give much credence to this? The condo may not sell easily, you might not be able to find a tenant right away, or be able to rent the condo at a high enough rental to cover the costs etc.

If you simply save money from your current extra cash flow and use that to make the down payment, the lender will be pondering the question

Can the applicants' current income support monthly payments of $1000 for the mortgage on the condo plus $1500 for the proposed mortgage on the new house?

Which deal will the lender be happier with?

If you are uncomfortable saving your extra cash flow in a savings account or CD or investing it in stocks and/or bonds until you need the money for the down-payment on your new house, put that money in a sock under your mattress (and don't smoke in bed!)

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