Learn more about taking out a second mortgage in Canada
More Canadians than ever are borrowing against their homes. Of all the loans taken out by individual borrowers, 46% are secured by real estate.
Second mortgages are loans that are secured by property, allowing borrowers to tap into the equity they've accumulated in their homes. This has definitely contributed to their popularity with Canadians.
The balance of all non-mortgage loans was $130 billion in 2018, according to the Office of the Superintendent of Financial Institutions (second mortgages are categorized as non-mortgage loans, despite having the word in the name).
Second mortgages are used to consolidate debt, finance home renovations, or as an emergency fund. They’re also cheaper than personal loans and credit cards.
Second mortgages often get confused with mortgage refinancing and reverse mortgages. Below, we explain how these products differ from second mortgages.
Keep reading to learn more about how to get a second mortgage in Canada and how to find the best deals on second mortgages. LowestRates.ca can connect you with a mortgage broker to help you secure a second mortgage. Start an application online for a second mortgage by clicking 'Get Started.'
Your questions about second mortgages, answered.
How does a second mortgage work?
So, what does it mean to take out a second mortgage?
In Canada, you can borrow up to 80% of the appraised value of your home minus the balance on your first mortgage, according to the Financial Consumer Agency of Canada. It’s a loan that is secured by the equity built up in your home.
Since your home equity acts as collateral, you do not need to make a down payment on your second mortgage. Also, your second mortgage doesn’t replace your first mortgage. If you take out a second mortgage, you will essentially be making double mortgage payments each month.
Mortgage brokers will use the terms “first position” and “second position” to refer to multiple mortgages. Your first mortgage lender (the one who provided the financing to buy the property) is in first position — they get paid first if you sell your house or you can no longer pay your mortgage. The lender who provided the second mortgage gets paid next — if there’s anything left. They are in “second position.”
That’s why interest rates on second mortgages are higher than on first mortgages. The lender is taking on a lot more risk.
Still, interest rates on second mortgages are still comparatively lower than credit card rates or unsecured loans.
Second mortgages can come in two forms:
- Conventional second mortgage.
- Home equity line of credit (HELOC).
Second mortgage fees: what are they?
Second mortgage lenders will charge an up-front fee. It is based on the amount of equity you own and whether you are choosing an open or closed mortgage.
An open mortgage is one that you can pay off at any time without penalty. A closed mortgage means you must adhere to the lender’s repayment schedule.
Since a home equity line of credit (HELOC) is a form of revolving credit, these fees will not apply. However, with a HELOC, you will pay monthly interest on whatever credit you do use.
Other fees that apply to both a traditional second mortgage and a HELOC include:
- Notary fees
- Legal fees
- Appraisal fees
What are the rules for second mortgages?
You can use your loan for whatever you want. Hypothetically, you can even purchase a second house with a second mortgage. The reason we're referring to this as a hypothetical scenario is because many second mortgage applicants do not have enough equity built up in the first property to secure a second mortgage large enough to finance the purchase of a new property (another possibility is that the bank would deem them incapable of servicing two mortgages).
And yet, more homeowners than ever are in fact using second mortgages for investing in Canadian real estate. If you’re considering using a second mortgage for this purpose, we advise you to speak with a financial planner before applying for one. Second mortgages are a convenient way to access cash, but it’s easy to overextend yourself financially.
Second mortgage comparison: what’s the best way to compare rates?
Right now, the best way to compare rates on second mortgages is to speak with a mortgage broker.
Mortgage brokers can you show you rates from multiple lenders, including banks and B-lenders. They can also help you secure a home equity line of credit.
LowestRates.ca can put you in touch with a mortgage broker. To speak with one today about rates on second mortgages, click 'Get Started.'
Here are a few more advantages of working with LowestRates.ca to find a second mortgage:
- Our broker network extends across Canada. Finding rates on second mortgages is easier than ever.
- A broker will show you the most current rates for second mortgages.
- A broker can help you decide whether you’re more suited to a variable-rate or a fixed-rate second mortgage.
Find the best second mortgage rates by speaking with a mortgage broker.
Second mortgages vs. mortgage refinance: what’s the difference?
A second mortgage doesn’t replace your first mortgage. For that, there's another process: it's what’s meant by “refinancing your mortgage.” To refinance a mortgage means you take out another mortgage at a new rate to pay off your first mortgage entirely.
However, it is possible to refinance second mortgages (but not HELOCs). Conventional second mortgages behave the same way as your original mortgage.
Second mortgages vs. home equity loans: what’s the difference?
Second mortgages come in the form of a traditional mortgage or home equity lines of credit (HELOCs). The repayment process is what separates the two.
Traditional second mortgage
- A one-time lump sum
- Payments include interest and principal.
- You will have to renew your second mortgage every year, at which point your interest rate may change.
- There are penalties for paying it off sooner than scheduled.
- Some people use second mortgages as a way to get financing for a second property. This isn’t feasible for many people; your home needs to be worth more than the amount you owe on your mortgage.
Home equity lines of credit (HELOC)
- HELOCs are a form of revolving credit.
- Interest rates are cheaper on a HELOC than they are with a reverse mortgage.
- The lender provides a line of credit that’s secured by the equity you own in your house.
- You can tap up to 80% of your home’s value.
- Like a credit card, you have a monthly credit limit.
- You make monthly payments to repay what you owe.
- You only pay interest on what you use.
- You can pay your debt off ahead of schedule, with no penalty.
- After you repay, you can borrow again. No need to reapply.
- Like with a conventional second mortgage, your home is collateral. You can lose your home if you don’t repay the loan.
Second mortgage vs. line of credit: What’s the difference?
A home equity line of credit (HELOC) is a type of second mortgage. A HELOC usually operates like a line of credit — one that is secured by the equity you own in your home. The benefit of choosing a HELOC is that you can get a larger loan amount than you would with a traditional line of credit.
Can a HELOC be used as a second mortgage?
Yes, a HELOC is a type of second mortgage. With a traditional second mortgage, you pay interest on the entire sum borrowed. With a HELOC, you only pay interest on the amount of credit you use.
You must have good credit to qualify for a HELOC.
Is a reverse mortgage a type of second mortgage?
No, a reverse mortgage is not a type of second mortgage.
With a reverse mortgage, you're giving some of the equity you built up back to the bank — you’re giving up part of your stake in your house. In exchange, your lender makes payments to you.
Home equity is the value of the home minus the unpaid mortgage balance. Your equity decreases as the unpaid mortgage balance gets larger. However, you still retain ownership (the title) of your home.
Interest rates on reverse mortgages are higher than conventional mortgages. There are also many fees (appraisal fee, closing costs).
Reverse mortgages are a popular option with seniors. This is because, in Canada, only people aged 55 and over can qualify for one.
When you die, the loan is repaid by the remaining equity in your estate.
What are some common reasons for getting a second mortgage?
Some of the major reasons people take out second mortgages are to:
- Consolidate high-interest debts.
- To use as an emergency fund to pay for unexpected expenses.
- Some people use a second mortgage to fund their children’s education.
- Pay for home renovations.
- To invest.
- To access their home’s equity without breaking their mortgage.
What are the advantages of a second mortgage?
Some of the benefits of a second mortgage include:
- Lower interest rates than a personal loan.
- You don’t need to have stellar credit to access these preferred rates. Second mortgage and reverse mortgage lenders only look at income and the amount of equity you own.
What are the disadvantages of a second mortgage?
There are disadvantages to carrying second mortgages:
- You can easily overextend yourself financially and put yourself into a vulnerable position.
- Rates are sensitive to fluctuations, such as the Bank of Canada’s key interest rate, which then influences your lender’s key lending rate, also known as the prime rate.
- Many people turn to B-lenders or private mortgage lenders for second mortgages and their loan terms tend to be very strict — if you default on a payment, you are putting yourself at risk.
Qualifications for second mortgages: what are they?
Here are the requirements for a second mortgage:
- You need to own at least 20% equity in your home.
- You must be able to make payments on a second mortgage without exceeding your Total Debt Service Ratio (TDS).
- Have a credit score above 680. You can still get a second mortgage with a low credit score, but you won’t qualify for the lender’s preferred rate. You will pay a higher rate than someone with a higher credit score.
- You also have to be employed; ideally, you have been with your current employer for some time and have a stable job history. Freelancers or entrepreneurs have to demonstrate a stable income stream and will likely need to turn to a B-lender.
How do you get a second mortgage?
You’re probably wondering how to get a second mortgage. The good news is that all mortgage lenders offer second mortgages in some form.
Breakdown of second mortgage companies in Canada:
Second mortgages can be obtained from your current mortgage provider, another bank, or B-lenders or private lenders.
HELOCs can be obtained from a bank, a mortgage trust company (CHIP, Home Trust, Equitable Trust), or private mortgage lenders.
What is the best way to get a second mortgage?
There are many avenues to a second mortgage. The one that keeps you from overextending yourself financially while helping you meet your goal of getting additional financing is the best one.
If you have a good credit score and provable income, you will be able to get a second mortgage from a bank, likely at a preferred rate.
If you are an entrepreneur or sole proprietor, you’ll likely get a second mortgage from a B-lender or private mortgage broker. These providers charge higher interest rates, especially if you have a poor credit score.
How do second mortgage rates compare to regular mortgage rates?
Rates on a second mortgage are higher than the rate you’re offered on your first mortgage. This is because the first mortgage will be paid off before the second mortgage if you were to default on your payments. Therefore, the second mortgage is higher risk than the first just because it's second in line.
How large can a second mortgage be?
It depends on how much equity you have. In the example below, a homeowner owns a condo that’s worth $250,000 and they have paid $100,000 into their mortgage already.
Here’s an example from the Financial Consumer Agency of Canada:
|Appraised value of home||$250,000|
|Maximum loan allowed||X 80% (0.80)|
|Loan amount based on appraised value||= $200,000|
|Less balance you owe on your mortgage||- $150,000|
|Second mortgage credit limit||$50,000|
Source: Financial Consumer Agency of Canada
Can you get a second mortgage with bad credit?
Many homeowners want to know how to get a second mortgage with bad credit.
You can indeed get a second mortgage with bad credit, but your interest rate will be higher than someone with a better score. As long as you own equity in your home, a stable and provable income, and manageable amounts of debt, you can qualify for a second mortgage.
In fact, sometimes a second mortgage can help you rebuild your credit, by paying off your debt.
You will not qualify for a HELOC with a low credit rating.
About the Author
Alexandra Bosanac is the Core Content Manager for LowestRates.ca. Her reporting has appeared in Canadian Business, the Toronto Star, the National Post, and the CBC.