Second Mortgages in Canada

June 4, 2021 | Posted by: Andrew Wade

Second Mortgages Explained

Second mortgages are loans taken against a home that already has a mortgage on it. In the case of a second mortgage, you are using your own home as collateral for the loan.

Using the equity built up over time in your first home, you can take out a second mortgage to finance other big purchases with this collateral. Some investors will take out a second mortgage in order to secure a down payment for a second property. Other uses for a second mortgage include paying for the following:

A child’s university or college tuition, or large student debts tying them down.
Consolidating high-interest debt (only if its a higher interest rate then they are paying on the debt)
Financing living costs after a job loss (short term living costs needed to get by)
A down payment for a second property (only if it makes sense of course)
Expensive medical treatment (not covered by insurance)
Large Home Renovations
There are two common kinds of second mortgages:home equity loans, and home equity lines of credit (HELOCs). Home equity loans are close-ended loans borrowed and paid back over time. HELOCs are open-ended loans that are borrowed against a homeowner’s home, paid back, and continuously borrowed if necessary. A HELOC IS similar to a personal line of credit or a credit card except there is collateral involved.

How Much Can You Borrow Through a Second Mortgage

The amount of money you can borrow through a second mortgage is dependent on a few factors: your loan to value ratio (LTV), your home’s total value, and your credit score. While different lenders have different rules around the loan to value ratio that they will lend within, most prime lenders will only allow you to borrow up to 80% of your home’s value.

Let’s take a look at an example of what you can borrow with a HELOC if you owned an $800,000 home, assuming you’ve paid off $300,000 in mortgage payments and interest.

Value of your home: $800,000

Maximum loan permitted: 80%

Loan amount based on home value: $640,000

Minus the balance owed on your mortgage: $500,000

Second mortgage credit limit: $140,000 max available depending on credit and the property marketability.

Where Can You Get a Second Mortgage?

Getting a second mortgage is not as easy as getting a first mortgage. Although you are able to borrow from a few different lenders, such as banks, credit unions, and alternative lenders, you are likely to face extremely high-interest fees with an alternative lender, as there aren’t as many of them available for a second mortgage. Banks and credit unions are the best choices in terms of interest rates for second mortgages.

Second Mortgage Rates

HELOC- Start around Prime which is currently 2.45% with most Financial Institutions but usually are 2.95% or higher depending on your situation for a secured line of credit. Interest only payments are typically made on these unless you pay extra to get the loan down.

Second Position Mortgages start around 6.99% and can include fee's and go up from there depending on how much you are looking to borrow. You can find lenders that will lend in this space like First Circle, Capital Direct, Fisgard, Community Trust, and many others of which I can give you the best prices and terms on. These are typically in a one or two year term and can vary from open to closed but the open mortgages will have higher rates for that flexibility. It’s important to note that a second mortgage always has a higher interest rate than a first mortgage. This is because the lender assumes more risk on a second mortgage than the first. If a borrower defaults on the loan or fails to pay it back, the first lender (first mortgage) always gets paid out first. The second lender takes more risk than the first lender because the chance of being paid out on time is lower than for the first lender or mortgage.

Fixed or Variable-You will have to decide whether you would like to go fixed or variable with your second mortgage just like your first. Fixed rates are constant rates that do not change for an agreed-upon period of time. A varibale rate either changes the payment, or amortization (length) of the loan depending on what the lender offers. This means that you could start with a more competitive rate, let’s say 3.5%, but it also means that the rate can skyrocket with the market.

Factors That Affect Your Second Mortgage Rates

There are a variety of factors that can increase or lower the rate of interest on your second mortgage:

Equity

Your equity is the amount of your house you actually own, when you subtract the market value of the home (what a buyer will pay today) vs the loan against it usually held as a mortgage. This means the actual amount of your mortgage you’ve paid off so for as well as the homes increased value since you purchased it. For example, if you have purchased a home for $500,000, 5 years ago and now it is worth $600,000 today. You have also paid down approximately $100,000 of your mortgage, you have $200,000 of equity plus what you put down for your downpayment.

Income

You’ll need to provide proof of income to ensure your lenders have faith in your ability to make your monthly payments. Generally, you will have a better chance of securing a lower interest rate if your income is high.

Credit Score

Your interest rate is likely to be lower if you have a good credit score. If you think your credit could be better, working to improve your credit score should be a top priority. This is a huge factor when it comes to B lending or securing a second mortgage as the rate of interest you will get will be largely determined by your credit score and your ability to pay this mortgage.

Property

Your property acts as collateral if you take out a second mortgage. This assures lenders that their investment is secure in the event that you are unable to make your repayments.

Pros and Cons of a Second Mortgage

Like all investments, taking out a second mortgage comes with pros and cons:

Pros	Cons
Access to Equity: If you own a home without a second mortgage on it, that means you may have hundreds of thousands of dollars in un-accessed equity. Taking out a second mortgage gives you access to that equity, and allows you to pay off debt or make other big purchases.	More debt: Second mortgage often means close to doubling your original mortgage payments. It’s important to assess your budget before deciding to take on this extra debt.
Paying Off Debt: Accessing your home’s equity can allow you to pay off your debt, indirectly increasing your credit score.	Low LTVs: Second mortgages attract lower loan to value (LTV) than first mortgages. With a second mortgage, you often won’t be allowed to borrow as much money as you could on your first home.
Refinancing Alternative: Second mortgages provide alternatives to refinancing, which can help you save on a variety of fees like exit fees and legal fees.	High Costs: Second mortgages usually have higher fees and interest rates than first mortgages.
Home Renovations: Home renovations can be quite costly, and accessing your home equity can help you cover those costs.	Limited Choice of Lenders: Alternative lenders are not as likely to lend a second mortgage to you. You’ll often find that A lenders, or banks, are the more common lenders for second mortgages.
Tuition: Second Mortgages have been taken out to cover school tuition payments.
Medical Expenses: If your insurance doesn’t cover hefty medical expenses, a second mortgage can help in emergency situations.

Final Thoughts

Before taking out a second mortgage, make sure you assess the risks involved and carefully plan your budget before making any decisions. Make sure you speak to a Mortgage Broker and get some advice you can rely on. With enough planning and research, a second mortgage can help you pay off debt, put your children through university, or even put a down payment on a second property.

Andrew Wade

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