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Published May 20, 2024
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Second Mortgage: Turning Home Equity Into Cash

Second mortgages give you access to cash — up to 80% of your home's value in some cases — but they can also cost you your house.

Second mortgages give you access to cash — up to 80% of your home’s value in some cases — but they can also cost you your house.

A second mortgage is a loan taken out on a property that already has a mortgage. A second mortgage gives Canadian homeowners a way to turn equity into cash, but it also means repaying two loans simultaneously — and potentially losing your house if you can’t.

Pros and cons of a second mortgage

Pros:

  • Tapping into your home equity gives you flexibility. You can use a second mortgage for anything, including debt repayment, home renovations or unexpected expenses.
  • You can access potentially large amounts of cash — up to 80% of your home’s appraised value.
  • Some lenders may allow you to qualify even if you have bad credit.
  • Because a second mortgage is secured by your home, interest rates may be lower than an unsecured loan.

Cons:

  • Your home becomes collateral for another loan, which means a higher risk of default and the loss of your home if your financial situation worsens.
  • You could pay a significantly higher interest rate compared to your primary mortgage.
  • Fees can be expensive.

Second mortgage: Definition and example

Second mortgages are based on your home equity, which is the value of your home minus whatever you owe on your current mortgage.

For example, say your home’s current market value is $500,000. If you still owe $300,000 on your mortgage, you have $200,000 of equity ($500,000 home value – $300,000 outstanding mortgage = $200,000 home equity).

You can’t borrow 100% of your home’ equity, though. The most you can unlock is 80% of your property’s value, minus what you owe on your current mortgage. In the example above, you’d be able to borrow up to $100,000. Here’s the math:

  • $500,000 (home value) * .8 (80% maximum) = $400,000
  • $400,000 (equity maximum) – $300,000 (outstanding mortgage) = $100,000 available to borrow
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Types of second mortgages

Home equity lines of credit (HELOCs) and home equity loans are the two main types of second mortgages. 

  • Home equity loans provide a lump sum amount upfront. 
  • HELOCs are a form of revolving credit, similar to a credit card. That means you can borrow different amounts at any time, up to a set limit. 

Many major financial institutions offer HELOCs, but, if you’re interested in a home equity loan, you’ll likely have to go to a private lender or consult with a mortgage broker.

Fees and interest rates on second mortgages

The fees you’ll pay for a second mortgage are often the same as a primary mortgage. They may include:

  • Administration fees.
  • Appraisal fees.
  • Title search fees.
  • Title insurance fees.
  • Legal fees.

Interest rates for second mortgages are often higher than your existing mortgage. Home equity loan interest rates can be either fixed or variable. HELOC rates are always variable.

The additional mortgage lender takes the second position on the property’s title. If you default and your home is sold, the original lender gets paid first. Since the second lender takes on additional risk of not being paid back, they charge you a premium.

How to qualify for a second mortgage

Just like your existing mortgage, you’ll need to qualify for a second mortgage before getting approved. Lenders will consider:

  • Equity. You’ll need to provide your primary mortgage details so the second mortgage lender can see how much equity you have.
  • Income verification. A letter of employment or recent pay stubs can show lenders that you have steady employment and can afford a second mortgage.
  • Credit score. Lenders will check your credit score during the qualification process. Generally, the higher your credit score, the better the loan terms you’ll be offered.
  • Property value. You’ll need a home appraisal to determine the current property value.

Alternatives to a second mortgage

If you’re in need of cash and can afford the added costs, a second mortgage could be the right move. But there are several other credit products that may be worth considering.

Collateral mortgage

A collateral mortgage is like a typical mortgage with an additional HELOC amount already approved. As your home equity increases, the amount you’re able to borrow does too.

You must apply for a collateral mortgage when you first apply for your mortgage. You can’t apply once your mortgage has begun like you can with a home equity line of credit

Blended mortgage

A blended mortgage is a popular option for homeowners when interest rates fall below the rate they’re currently paying. Typically, you’ll get a lower interest rate plus the opportunity to access the equity in your home — two options that can improve your cash flow situation.

The rate you wind up with should fall between your existing mortgage rate and the current rates being offered by your lender, hence the term “blended.” Since you’re technically keeping your mortgage — not refinancing — you can avoid prepayment fees.

Personal loans and unsecured lines of credit

Under some circumstances, an unsecured form of credit could be a better fit for your short-term financing needs. 

For example, if a second mortgage from a private lender is going to cost you 12% interest over the next 12 months, it’s not a bad idea to explore personal loan or line of credit options and see if there’s a cheaper way to borrow.

Getting a mortgage for a second home

Buying a property that isn’t your primary residence is an entirely different process from getting a second mortgage. With a second mortgage, you have two loans on the same house. When buying a second home, each home has its own mortgage.

If you buy a second home or investment property, you’ll have to apply for a new mortgage — one that only applies to the new property. You’ll have to qualify, pass the mortgage stress test and, crucially, provide a down payment of at least 20%.Your first home can play a factor in your new mortgage by increasing your assets, impacting your debt service ratios and maybe even providing some of the funds for your down payment. But getting a new mortgage doesn’t technically mean you have a “second mortgage.” It just means you now have two homes, each with its own mortgage.

Frequently asked questions about second mortgages

Is getting a second mortgage a good idea?

A second mortgage is only a good idea if you’re confident you can pay it off without damaging your finances. Second mortgages can come with high interest rates and, depending on the lender, short, restrictive repayment schedules that can be difficult to maintain — especially if you’re already short on cash.

Is a second mortgage the same as a home equity loan?

Yes. A home equity loan is a loan secured by an already mortgaged property, so a home equity loan is really just a type of second mortgage. The other main type is a HELOC. 

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