On this page
These two products get confused because both let you borrow against the home without selling it. They behave very differently once you have signed, and the difference shows up in the payment, the cost and the risk.
The side-by-side
| HELOC | Second mortgage | |
|---|---|---|
| Form | Revolving line of credit | One lump sum |
| Ceiling | Up to 65% of appraised value | Up to 80% of appraised value, minus the mortgage balance |
| Rate | Usually variable, tied to the lender’s prime | Fixed or variable, usually higher than a first mortgage |
| Payments | Can be interest only | Set by the loan terms, and can be interest only |
| Reborrowing | Yes, as you repay | No |
| Typical lender | Banks and credit unions | Banks, B lenders and private lenders |
The limits and the description of the rate come from the Financial Consumer Agency of Canada. Everything else on this page is built on those figures.
Why the ceilings differ
A HELOC from a federally regulated lender is held to the guideline on residential mortgage underwriting from the Office of the Superintendent of Financial Institutions. That regulator’s clarification says a HELOC’s maximum loan-to-value is 65% or less, and that when a HELOC is paired with a mortgage in a combined plan, the overall limit cannot exceed 80%. The legal maximum for an uninsured mortgage at those lenders is also 80%.
That is the reason a bank may cap you at 65% on a line of credit, while a second mortgage can reach to 80% of the home. The guideline is aimed at federally regulated lenders. A private lender is not a federally regulated bank, so check which rules apply to the one you are speaking to.
How the payments behave
A HELOC lets you pay interest only, which keeps the payment low. The agency points out the cost of that choice: interest-only payments never reduce what you owe. A variable rate also means the payment can rise without you doing anything, and the lender may change it at any time with notice in writing within 30 days.
A second mortgage usually has a defined term. You know the payment and you know the date the balance is due. The risk sits at the end, when the lender expects the full amount or a renewal, and a renewal may carry a fee.
What each costs to set up
A bank HELOC often has modest setup costs, such as an appraisal and legal work, and the agency lists appraisal, title search, title insurance and legal fees among the costs of borrowing against your home. A private second mortgage has those plus a lender fee and often a broker fee.
The first worked example above adds them up for the same $60,000. The second mortgage costs $5,500 more in the first year on assumed numbers. Real figures vary by lender, so use the calculator with an actual quote.
Which one risks more
Both are secured against the home, and the agency states that if you cannot repay, you could lose it. The risks differ in shape. A HELOC’s risk is drift: a balance that never falls, a rate that moves, and a limit set by someone else. A second mortgage’s risk is the due date: a lump sum that must be repaid or refinanced on a schedule you did not control.
Neither is safe if your income has stopped. If that is your situation, the help pages cover options that come before a new loan.
Which situation suits which
A HELOC tends to suit spending that arrives in pieces, such as a renovation paid in stages, because you draw what you need and pay interest on what you have drawn. A second mortgage tends to suit a single known amount, such as a payoff with a fixed bill, because the sum and the payment are set from day one.
Think about the next few years too. If you expect your credit to improve and a bank to lend to you later, a short second mortgage can act as a bridge to a cheaper product. If you expect to need the money again and again, a revolving line suits that better, provided a bank will approve it. And if your rate on either product can move, test what a higher payment would do to your budget before you borrow.
What changes at renewal
A HELOC does not have a due date in the same way: it stays open while the lender keeps the facility in place. A second mortgage does, and the date matters more than most people expect. As it approaches, you will want a decision about repaying, refinancing or extending, ideally three months ahead, so that a lender has time to say yes and you are not negotiating with a deadline on top of you.
If you took a second mortgage because a bank said no, ask what would need to change for a bank to say yes next time. It might be a higher credit score, a lower debt ratio or a longer record of self-employed income, and each is something you can work on during the term.
A way to choose
Start by asking whether you can qualify for a HELOC at a bank or credit union. If yes, it is usually the cheaper tool, particularly for spending that comes in stages. If a bank has said no, a second mortgage may be the next thing to look at, and then the questions to ask are about exit: what is the term, what is the full cost, and how will it be repaid.
For the broader picture of how private lenders work, read what a private second mortgage is. To talk to a licensed professional about either product, you can check your options.
Borrowing $60,000 for one year on each product
Made-up figures. The HELOC rate is an assumed 8% and you pay only interest, with an assumed $1,000 for legal and appraisal. The second mortgage is interest only at an assumed 12%, with an assumed 2% lender fee, 1.5% broker fee and $2,000 for legal, appraisal and title.
- HELOC interest for a year
- $4,800
- HELOC setup costs
- $1,000
- HELOC cost in year one
- $5,800
- Second mortgage interest for a year
- $7,200
- Second mortgage fees
- $4,100
- Second mortgage cost in year one
- $11,300
$1,200 lender, $900 broker, $2,000 legal and other
Room to borrow on an $800,000 home that already carries $520,000
Made-up figures, using the limits the Financial Consumer Agency of Canada publishes: up to 65% of appraised value for a HELOC and up to 80% for a second mortgage, less what you owe. This assumes the lender counts your existing mortgage against the 65% cap.
- Home value
- $800,000
- Owed on the first mortgage
- $520,000
- HELOC ceiling at 65% of value
- $520,000
- Room left under the HELOC ceiling
- $0
- Second mortgage ceiling at 80% of value
- $640,000
- Room left under the second mortgage ceiling
- $120,000
$520,000 minus $520,000, so little or no bank HELOC room on these assumptions
Questions people ask
Can a lender freeze or cut my HELOC?
The agency says a lender may change the rate on a HELOC at any time and must tell you in writing within 30 days. Read the agreement for what it says about the limit, because a line you rely on is only as steady as its terms.
Which one is better for a single large expense?
A second mortgage is built for one lump sum, with a known payment and end date. A HELOC suits spending that comes in stages, because you only pay interest on what you have used. For a single expense you will repay on a fixed schedule, compare the total cost of both.
Do I need good credit for each one?
A bank HELOC usually involves a credit and income review, since it is a bank product held to federal lending rules. A private second mortgage is underwritten mostly on equity and the plan to repay, so it reaches people a bank turns away, at a higher cost.
Is a home equity loan the same as a second mortgage?
They are close. The agency describes a home equity loan as a lump sum borrowed against the home, available up to 80% of its appraised value, and describes a second mortgage in similar terms. A second mortgage is specifically a loan registered behind the first mortgage.
What happens to both if I sell the home?
Each is secured against the home, so each is repaid from the sale proceeds, in order of ranking. The first mortgage is paid first, then the second charge. Whatever remains is yours, and a lender may charge to discharge its loan early.