What is a Second Mortgage?
Second Mortgage Explanation
If you have an existing mortgage, you may still borrow more money against your home with a second mortgage. A second mortgage can be in the form of a home equity line of credit (HELOC) or an additional mortgage (home equity loan).
- Maximum combined loan-to-value of 80%
- Higher mortgage interest rate compared to a primary mortgage
- Can be used for anything: home improvements, debt consolidation, down payment on another home, or to invest
Types of Second Mortgages
A second mortgage can be in the form of a home equity line of credit (HELOC) or an additional mortgage (home equity loan). You might also get a second mortgage through a private lender.
| HELOC | Home Equity Loan | Private Mortgage | |
|---|---|---|---|
| Interest Rate | 4.45% (Prime + 2%) | 3% - 6% | 6% - 9% |
| Type of Loan | Revolving | Fixed | Fixed |
| Minimum Credit Score | 650+ | Varies | No Minimum |
| Maximum Loan-to-Value (LTV) | 80% | 80% | 95% |
| Lenders | Major Banks Credit Unions B-Lenders Private Lenders | Major Banks Credit Unions B-Lenders Private Lenders | Private Lenders |
The Differences Between First & Second Mortgages
| Second Mortgage | |
|---|---|
| Interest Rate | Higher than first mortgages |
| Borrowing Amount | Often less than first mortgages |
Second Mortgage Lenders
The major banks aren’t the only second mortgage companies in Canada. While the Big 5 Banks all offer HELOCs, RBC and BMO are the only major banks to offer home equity loans. Here are some second mortgage lenders in Canada:
Using a HELOC as a Second Mortgage
A home equity line of credit is a revolving loan that allows you to borrow money at any time up to a certain credit limit. When you get a HELOC in addition to a separate mortgage, your HELOC is considered to be a second mortgage. You’ll be making two monthly or bi-weekly payments: one for your mortgage, and one for your HELOC.
You do not have to get a HELOC with your current mortgage lender. You can get a HELOC with another bank or any lender, though it would mean that you would need to make payments to two separate lenders.
Some banks and lenders offer readvanceable mortgages, which combine a HELOC into your existing mortgage. The HELOC portion of a readvanceable portion has a credit limit that automatically increases as you make your readvanceable mortgage payments. This lets you borrow your mortgage payments, which is a crucial part of the Smith Maneuver tax strategy.
To learn more about HELOCs, including how much you can borrow, how much your HELOC payments would be, and the various ways that a HELOC can be used, visit our home equity line of credit calculator. The latest rates from various HELOC lenders can also be seen on our HELOC rates page.
Home Equity Loan/Private Mortgages
A home equity loan is a fixed-amount of money that you borrow based on your home equity. While HELOCs have variable interest rates that change with the prime rate, home equity loans can have either a variable rate or a fixed rate.
You can borrow up to a combined 80% of the value of your home with your existing mortgage and a home equity loan. To learn more about loan-to-value and to see if the amount that you want to borrow is under the 80% limit, visit our LTV calculator.
Private mortgages are also home equity loans, but they differ in that they are offered by private lenders and have less strict lending requirements. Private lenders may even allow you to borrow up to 95% of the value of your home. To learn more about private lenders, visit our private mortgage lenders page or our private mortgage rates page.
How does a second mortgage work?
A second mortgage is a secured loan that allows you to borrow money in exchange for putting your home up as collateral when you already have an existing mortgage on the home. It’s called a “second” mortgage because it is second in line to your property title should you default on your mortgage.
You’re able to borrow more money based on your home equity. As you pay off your first mortgage, you’re building up your equity. It also increases if the market value of your home increases. A second mortgage allows you to borrow money by unlocking your home equity, which means that you won’t have to sell your home in order to access your equity.
Your existing mortgage is not affected by getting a second mortgage, since your primary mortgage is still first in line. In a foreclosure, the lender will gain ownership of the home by taking the title, which means that your primary mortgage lender will be the first to be repaid.
There’s also a maximum limit to how much you can borrow that takes into account all mortgages and HELOCs secured against the property. For example, you won’t be able to re-borrow an additional 100% of the value of your home with a second mortgage on top of an already existing mortgage. This limit, called a combined loan-to-value ratio (LTV), is usually 80%.
Second Mortgage Conditions
Maximum Loan Size
You can borrow up to 65% of your home’s value with a HELOC, or up to a combined total of 80% with your existing mortgage. Private lenders usually allow you to borrow up to 85% with a private mortgage, though some lenders may allow you to borrow up to 95%. The amount that you can borrow from a second mortgage will depend on the amount of home equity that you own. Your combined mortgage size versus your home’s value is called your loan-to-value ratio (LTV). For more information, visit our loan-to-value calculator page.
How much can I borrow?
A HELOC lets you borrow up to 80% of your home's value, while a private mortgage home equity loan lets you borrow up to 95%. This is after accounting for your existing first mortgage loan. However, not all private lenders allow a max LTV of 95%. In any case, the smaller your existing first mortgage, the larger your second mortgage can be.
For example, let's say that:
- Your home value is $500,000
- You have an existing $200,000 mortgage
How much can you borrow with a HELOC?
- $500,000 x 80% HELOC limit = $400,000 maximum
- $400,000 maximum - $200,000 existing mortgage = $200,000 HELOC limit
- With a HELOC, the maximum amount that you can borrow is $200,000
How much can you borrow with a home equity loan from a private lender?
- $500,000 x 95% home equity limit = $475,000
- $475,000 maximum - $200,000 existing mortgage = $275,000 home equity loan limit
- With a home equity loan from a private lender that allows a maximum LTV of 95%, the maximum amount that you can borrow is $275,000
To find out how much you can borrow with a second mortgage, you can use a second mortgage calculator.
Type of Loan
HELOCs are revolving loans while home equity loans and private mortgages are fixed. This means that you can borrow at any time up to your credit limit with a HELOC, making it a more flexible option compared to a fixed loan.
Credit Score
HELOCs require you to have a good credit score, which would be 650 or greater, while private mortgage lenders accept those with bad credit scores or self-employed.
Term Length
HELOCs have extendable terms that can last many years, while private mortgages are short, often ranging from a few months to a few years.
Second Mortgage Rates
HELOC rates are much lower than private mortgage rates. HELOCs have variable rates, while second mortgages can have either fixed or variable rates. To check current second mortgage rates, visit our HELOC rates and private mortgage rates pages.
How to apply for a second mortgage
How to get a second mortgage
Applying for a second mortgage is similar to applying for your first mortgage
- Choose a lender: While it’s common to get a second mortgage with your current mortgage lender, you should compare second mortgage rates offered by other lenders.
- Provide documents: You will need documents to prove your employment and income, your financials, and details about your property
- Home appraisal: Since second mortgages are based on your home equity, your mortgage lender will require you to get a home appraisal so that your home’s value is up to date
- Pass the mortgage stress test: You will need to undergo a mortgage stress test when applying for a second mortgage at any federally regulated lender. HELOCs and home equity loans require you to pass the stress test. Private mortgages do not require a stress test. To learn more about the stress test, visit our mortgage stress test guide.
- Closing: If you’re approved for a second mortgage, you’ll now have to pay for any closing costs. If you applied for a HELOC, you can now access your funds freely. If you applied for a home equity loan or a private second mortgage, you will receive the entire amount that you borrowed as a one-time cash payment.
What’s a revolving loan?
A revolving loan, or a revolving credit, allows the borrower to borrow and make repayments at any time. Revolving loans already have a maximum credit limit that was determined when the loan was initially applied for. This means that a borrower can borrow money whenever they need to, as they can easily access the money without needing to make additional applications each time they want to borrow money. Examples include credit cards and lines of credit. For a home equity line of credit, the credit limit is based in part on your home equity.
The opposite of a revolving loan is an installment loan, such as a home equity loan or a private mortgage. With these types of loans, you can’t borrow more money and your loan repayments are controlled through regularly scheduled payments. You may also even be charged prepayment penalties if you make more payments then your lender allows for in a certain time period.
1st Mortgages vs 2nd Mortgages
Whether a mortgage is a first mortgage or a second mortgage doesn’t depend on when the mortgage was made, but rather on how the mortgage is registered. When you use an asset as collateral to borrow money, which in this case is your home, then the lender has the right to take possession of your asset should you not repay the loan. What happens if you borrow money from multiple lenders and use the same asset as collateral? Should you default on your loan, the order in which the lenders are repaid depend on their position in line to the collateral.
When you first get a mortgage to buy a home, that mortgage is called a first mortgage. There are no other mortgages or liens secured by the home yet, and so it is in first position. If you choose to get another loan, such as a HELOC or home equity loan, then it will most likely be in second position if your first mortgage hasn’t been fully paid off yet. That’s because your original primary lender won’t want to give up their first position or primary lien. A HELOC or home equity loan in second position is called a second mortgage.
Comparing First and Second Mortgages
| First Mortgage | Second Mortgage | |
|---|---|---|
| Interest Rate | Lower than second mortgages | Higher than first mortgages |
| Borrowing Amount | Often more than second mortgages | Often less than first mortgages |
Why Get a Second Mortgage Instead of Refinancing?
A cash-out refinance has the same characteristics as a second mortgage, so what’s the difference between a second mortgage and refinancing? If you choose to refinance your first mortgage, you can borrow up to 80% of your home’s value. The difference between the amount that you are borrowing and your first mortgage amount is the amount that you are borrowing as cash. This amount can be “cashed-out” and used for things like debt consolidation or renovations. With a mortgage refinance, you will be resetting the terms of your mortgage. This means that your mortgage rate might change along with your mortgage payments.
The benefit of a second mortgage is that you can borrow money without needing to touch your first mortgage. For example, if you locked in a great mortgage rate for your first mortgage, you might not want to affect your rate just to borrow more money. Instead, you can borrow more money with a second mortgage while keeping your first mortgage intact. A mortgage refinance can also include significant closing costs while some second mortgages, such as HELOCs, can have lower closing costs.
Silent Second Mortgages
A silent second mortgage is when you borrow a second mortgage but you hide it from your primary mortgage lender. For example, a home buyer might get a silent second mortgage to borrow money for the home’s down payment without your primary mortgage lender knowing. Silent second mortgages are illegal in Canada.
Second Mortgage FAQ
What are second mortgages used for?
A second mortgage is a way for homeowners to borrow money using their equity in their home. The money that homeowners borrow from a second mortgage can be used for paying off high-interest debt, such as credit cards. It can also be used for debt consolidation, home renovations, home improvements, tuition, medical expenses, or investments.
What second mortgage fees are there?
When applying for a second mortgage, you will have to pay fees such as an appraisal fee, title service fees, and legal fees. Some private mortgage lenders may also charge additional lending fees.
Some common second mortgage fees include:
- Administrative Fees: $150 - $200
- Legal Fees: $500 - $1,500
- Home Appraisal Fee: $300 - $600
- Title Search: $250 - $500
- Private Mortgage Lender Fees: 1% - 3%
These fees are paid when opening your HELOC or private mortgage, which means that it will increase your cost of borrowing over just the interest on the second mortgage alone. A second mortgage’s APR will have fees factored in.
What happens if I default on my second mortgage?
Loans secured against your home will have a priority in which they will be repaid if you default on your loans. If you default and foreclosure occurs, the loan that is first in line will be repaid in full before any other loans secured against your home. The remaining amounts after the first loan have been paid off will go to the second mortgage, and so on.
For example, if your home’s value is $500,000 and you have a first mortgage balance of $300,000 and a second mortgage of $100,000, both of your mortgage lenders will be able to be repaid in full. If your home’s value is only $350,000, your first mortgage will be repaid in full while your second mortgage lender will only be able to recover $50,000.
Second Mortgage Statistics and Facts 2021
- The average homeowner in Canada has a loan-to-value ratio of 27%. That means that the average home equity is 73%.
- 91% of homeowners have a LTV of less than 75%. That means that over 91% of homeowners are eligible for a second mortgage.
- 17% of all homeowners have a second mortgage consisting of a mortgage and a HELOC, up from 14% in 2019
- The average credit limit for a HELOC in Canada is $152,000, while the average amount used is $59,000.
- Purpose of borrowing a second mortgage (and compared to 2019 levels)
- Debt consolidation - 25% (up from 23%)
- Investments - 24% (up from 18%)
- Home renovations or repairs - 23% (down from 39%)
- General spending - 19% (up from 12%)
- To help a relative purchase a home - 4% (up from 2%)
- Other purposes 6% - (no change)
Source: Mortgage Professionals Canada Year-End 2020 Report