What is a Second Mortgage?
What You Should Know
- A second mortgage is an additional loan against your home's equity, on top of your existing mortgage.
- You can borrow up to 80% of your home's appraised value, minus your first mortgage and any HELOC balance.
- Second mortgages entail a higher risk for lenders, commanding higher mortgage interest rates compared to a primary mortgage.
- Your home is the collateral, so missing payments can lead to foreclosure, even on a second mortgage.
Second Mortgages as Home Equity Loans
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, a home equity loan often specifically refers to a second mortgage.
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:
Second Mortgage Rates in Canada
Second mortgage rates in Canada are typically higher than first mortgage rates because they are riskier for lenders. Rates usually range from 6% to 12% or more, depending on your credit score, home equity, and lender type.
For comparison, current first mortgage rates in Canada are between 3% to 5%, making second mortgages significantly more expensive.
| Type | Typical Rate |
|---|---|
| A-lender / bank (rare) | ~5%–8% |
| B-lender | ~6%–12% |
| Private lender | ~9%–15%+ |
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. When getting a HELOC, keep the following in mind:
- You will make two monthly or bi-weekly payments: one for your mortgage, and one for your HELOC.
- You can get a second mortgage or HELOC with any lender, not just your current one.
- If your mortgage is a standard charge, getting a second mortgage requires registering a new charge on your title, which comes with provincial fees and legal fees.
- If your mortgage is a collateral charge, your current lender can add a HELOC or second mortgage without a new registration.
- Some lenders offer readvanceable mortgages, which combine a HELOC with your mortgage. The credit limit grows as you make payments, enabling strategies like the Smith Maneuver.
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.
- Borrowing from a financial institution caps your combined mortgage, HELOC, and home equity loan at 80% of your home's value.
- Private lenders might offer home equity loans with no borrowing cap, but the higher your combined loan-to-value, the higher your rate and fees.
How Does a Second Mortgage Work?
A second mortgage is a secured loan that lets you borrow against the equity you've built in your home, without touching your existing mortgage. Here's how it works:
- Secured loan ranked below your first mortgage: A second mortgage is registered against your home as collateral. It's called "second" because it stands behind your primary mortgage in line for repayment if you default.
- Equity determines how much you can borrow: Equity grows as you pay down your first mortgage, as your home's market value rises, or through renovations. A second mortgage unlocks that equity without requiring you to sell your home.
- First mortgage is unaffected, but refinancing gets complicated: Taking on a second mortgage doesn't change your primary mortgage's senior position. If you later want to refinance, however, your second mortgage lender must sign a subordination agreement to restore your primary mortgage to first position.
- Second mortgage lenders take on significant risk in a foreclosure: A senior lender has little incentive to maximize the sale price, meaning a junior lender may recover little or nothing if property values have fallen. This is why second mortgages carry higher interest rates.
- There is a firm cap on total borrowing: Your combined balance across all mortgages and HELOCs cannot exceed a loan-to-value (LTV) ratio of 80% of your home's appraised value.
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).
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 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 borrow against your home as collateral, the lender has the right to take possession if you default. When multiple lenders are secured against the same property, repayment follows a strict priority order.
Your original mortgage holds first position since it was registered first when no other lien existed on the property. Any subsequent loan, such as a HELOC or home equity loan, falls into second position because your primary lender won't give up their primary claim. A loan in that second position is what's known as 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: $1,000 - $1,600
- 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
- 70% of all outstanding mortgages in Canada have a loan-to-value ratio of 65% or less, meaning the majority of homeowners have substantial equity available. (Bank of Canada, 2024)
- Home improvements and renovations are the top reasons Canadians refinance their mortgage, cited by 33% of refinancers, followed by debt consolidation at 23%. (CMHC Mortgage Consumer Survey, 2024)
- HELOC funds are used for debt consolidation (28%), home renovations (25%), general consumption (25%), and investments (22%). (Statistics Canada, 2024)
- 19% of homeowners plan to finance renovations using HELOCs. (CMHC Mortgage Consumer Survey, 2024)
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
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- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.