Second Mortgages in Canada: When & How?

A second mortgage is a loan you get in addition to the first mortgage that you have already registered for your home.

Second mortgage rates are generally higher because second mortgages are relatively riskier for the lenders. In order for you to understand why it is so, and decide whether or not a certain second mortgage rate is reasonable, let’s have an example of a second mortgage.  

Imagine the value of your home in Canada is $350,000 and you have already got a $200,000 mortgage for your home through a mortgage company In Canada. The remaining will be $150,000 ($350,000 minus $200,000). This is your home equity. In other words, this is the part of your home value that you have not received a mortgage for. Therefore, you don’t owe this much of your home value to a mortgage company.

Now imagine that you need $100,000 for a reason. Because your home equity is $150,000, you can then ask for a $100,000 loan, which is less than $150,000. This new amount that you get as a loan is called a 2nd mortgage. Sometimes second mortgage might be also called home equity line of credit or home equity loan, but they are second mortgages if they are taken in addition to your first mortgage.

In Canada, in order to get a better interest rate, your second mortgage must be insured and the mortgage default insurance premium will be then added on top of your basic loan amount. Although it may first seem that the amount of your second mortgage has been increased, you will usually have lower rates for you mortgage with lower monthly payments when you insure your second mortgage.

In a fixed rate mortgage, as the name suggests, the interest rate for your mortgage is fixed for an appointed period of time which in Canada is usually between 6 months to 25 years. The good thing about a second mortgage with a fixed rate is that you know how much you are paying for a set period of time which is technically called ‘term’.

In contrast, you may want to go for a second mortgage with a variable rate. This means that the fluctuation in the interest rate will determine how much your monthly payment will be appointed for the principle of your mortgage and what portion to be appointed for the interest. If interest rates go down, more of your payment will help reduce the principal of your second mortgage; if rates go up, a larger portion of your monthly payment will be appointed to cover the interest rather than the principle. Although interest rates may fluctuate from month to month depending on market conditions in Canada, the payments of your second mortgage are fixed for a period of one to two years.

Because second mortgage rates, and generally mortgage rates, change quite frequently, you many want to choose a longer-term mortgage if you don’t want to involve yourself with the rate changes. But if you want to choose a more flexible option, a shorter-term mortgage then allows you to potentially take advantage of lower rates.