HELOC or second mortgage: what is the difference?

In Canada, a HELOC is a revolving line of credit secured on your home, while a second mortgage is a one-time lump sum registered behind your first mortgage. You draw on a HELOC and repay it as you need, and a HELOC usually comes from a bank, credit union or monoline lender. A second mortgage usually comes from an alternative or private lender, and it typically costs more.

How a HELOC works

A home equity line of credit lets you borrow up to a limit, repay and borrow again. With a federally regulated lender, the revolving limit can be up to 65% of your home's value, and your mortgage plus HELOC together can go up to 80% (source: OSFI).

HELOCs usually have a variable rate tied to prime, and many require only interest each month. With a federally regulated lender, you qualify under the stress test: the greater of the contract rate plus 2 percentage points or 5.25%. Lenders generally test you as though the full line were in use.

A HELOC suits you if you have good credit, steady income and enough equity, and want flexibility for renovations, irregular expenses or a standby reserve.

How a second mortgage works

A second mortgage is a separate loan, registered on title behind your existing mortgage. If the home is sold, the first mortgage is repaid first. Because the second mortgage ranks behind, second mortgages carry more risk for the lender and a higher cost for you.

Second mortgages usually have:

A fixed amount advanced at once.
A short term, then renewal or repayment.
A higher rate than a first mortgage or HELOC.
Lender and broker fees, which must be disclosed to you in writing before you commit.

A second mortgage can suit you if you need funds now but your credit or income does not fit a bank HELOC, or if your first mortgage would cost a lot to break.

How to choose between a HELOC and a second mortgage

Ask three questions:

Do you qualify for a HELOC? If so, a HELOC is usually the lower-cost route.
Do you need money once or over time? A HELOC fits staged needs; a second mortgage gives a lump sum.
How will you repay the second mortgage? A second mortgage generally works better kept short, with a plan such as refinancing everything into one mortgage at your next renewal.

If you are close to the end of your term, a full refinance at renewal may be simpler than either, with no penalty.

Which lenders we look at first

We look first at banks, credit unions and monoline lenders for a HELOC or refinance. If a bank, credit union or monoline lender does not fit, we compare alternative lenders' second mortgages and set out the total cost, including fees. Private second mortgages are a short bridge only; we refer that work to Stonefield Capital, our private-lending brand.

What to do next

To estimate your HELOC room, try the HELOC room tool; results are estimates only, not an offer or advice. Or use our call-me-back form and we will compare the HELOC and the second mortgage with you.

Common follow-up questions

Can I get a second mortgage if I already have a HELOC?

Sometimes, but a second mortgage is harder to get behind a HELOC, because the HELOC lender is repaid first and the total borrowing is limited. We would review whether combining the HELOC and the second mortgage into one product is simpler.

Does a second mortgage affect my first mortgage?

Your first mortgage stays in place with its own terms. Check your first mortgage agreement, because some lenders have conditions about additional charges on title.

Which is easier to pay off?

Usually the HELOC, which can generally be repaid at any time. A second mortgage may have its own prepayment terms, so read them before you sign.