What is a Second Mortgage?
What You Should Know
- You can take a second mortgage as large as 80% of the appraised value of your property minus the money already borrowed against your home (what you owe under your first mortgage and your HELOC).
- Second mortgages entail higher risk for lenders, so they command a higher mortgage interest rate compared to a primary mortgage.
Second Mortgages among Home Equity Loans
Technically, a home equity loan is a loan secured by a home. A mortgage is a loan that uses real property as collateral. Thus, in the context of residential properties, a home equity loan is synonymous with a mortgage. With this broad definition, home equity loans include residential first mortgages, home equity lines of credit (HELOC) and second mortgages. In Canada, home equity loan often specifically refers to second mortgages.
Second Mortgage Compared with HELOC and First Mortgage
| First mortgage | HELOC | Second mortgage | |
|---|---|---|---|
| Security | Always secure | Might become unsecured | Can become unsecured |
| Availability | All mortgage lenders | Most mortgage lenders | Few mortgage lenders |
| Relative Interest rate | Low | Medium | High |
| Fixed or variable | Both available | Variable rate | Both available |
Second Mortgage Lenders
While the Big 5 Banks all offer HELOCs, RBC and BMO are the only major banks offering home equity loans (second mortgages). Many smaller lenders and private lenders might also offer second mortgages. Here are some mortgage lenders in Canada, including second mortgage lenders:
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 can act as 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 second mortgage or HELOC with another bank or any lender. If your mortgage is registered on your title as a standard charge mortgage, getting a second mortgage or HELOC entails registering a new charge on your title. Registering a charge on your title would entail some fees depending on your province (these costs are a subset of buyer closing costs). Suppose your current mortgage is registered as a collateral charge on your title. In that case, your current lender can offer you a HELOC or a second mortgage without requiring registration of a new charge on your title.
Some banks and lenders offer readvanceable mortgages, which combine a HELOC into your existing mortgage. The HELOC portion of a readvanceable mortgage 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 and Private Mortgage Lenders
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, HELOC and a home equity loan if you are borrowing from a financial institution. 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 mortgage lenders also offer home equity loans, but they are risking their own money as opposed to a financial institution using its depositors' money. As a result, private mortgage lenders are not limited in the amount they can loan. But the higher your combined loan to value (CLTV) becomes, the higher your interest rates and fees become. 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. Home equity also increases if the market value of your home increases or if you renovate your home. 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.
When multiple charges are registered on a title, the older the charge, the more senior it is. Some liens, like property tax lien, are senior to other liens irrespective of their date. Thus, your existing mortgage is not affected by getting a second mortgage since your primary mortgage is still first in line. Refinancing can bring your second mortgage to the senior position. Thus, you could not refinance your mortgage unless your second mortgage lender agrees to sign a subordination agreement, which would bring your main mortgage back to the senior position. In a foreclosure, a senior lender can ask for an order absolute. If the court agrees, the title would transfer to the senior lender, and junior lien holders would simply become unsecured creditors.
In most cases, however, a senior lender would ask for and receive a sale order. With a sale order, they have to sell the property and use the proceeds to satisfy all lien holders in order of seniority. Unfortunately, they have little incentive to be patient and sell the house at the highest possible price. A senior lender may be happy with any bid which is just high enough to pay them back and do not worry about what happens to junior lenders. In such a situation, a junior lender might convince the senior lender to allow them to take a lead in the foreclosure process, or they might buy out the senior mortgage. But if house prices fall or if, during a lengthy foreclosure process, the house falls into disrepair, even selling the house at fair market value might not be enough to pay a junior lender (or maybe even the senior lender) in full. As a result, second mortgages are much riskier for a lender, and they demand a higher interest rate to adjust for this added risk.
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. 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?
Canadian law allows lending against real property to a maximum of 80% of the value of that property. The Office of the Superintendent of Financial Institutions (OSFI) is the regulator of Canadian financial institutions. OSFI has published Guideline B-20, which sets out regulations regarding residential mortgages. Guideline B-20 limits non-amortizing mortgages to 65% of the property value. So, in short, the sum of the money you borrow cannot exceed 80% of the home value, while the HELOC portion cannot exceed 65% of the home value.
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 second mortgage?
- $500,000 x 80% Mortgage limit = $400,000 maximum
- $400,000 maximum - $200,000 existing mortgage = $200,000 Second mortgage limit
- With a second mortgage, the maximum amount that you can borrow is $200,000
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 first mortgages or second mortgages (home equity loans) are structured. This means that you can borrow at any time up to your credit limit with a HELOC, while a first or second mortgage advances you a lump sum initially, and then you make payments on a predetermined schedule. Thus, a HELOC is a more flexible option compared to a structured 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.
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 will be charged prepayment penalties if you make more pre-payments than your lender allows for in a certain time period.
1st Mortgages vs 2nd Mortgages
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