Who this is for: Homeowners with real equity who are considering a second property, an investment or a child's purchase, and who can carry the loan if the new asset earns nothing.
On this page
People do this for good reasons. A parent wants to help a child into a home. A homeowner sees a second property or a small investment worth pursuing. The equity in the house is sitting there, and a second mortgage is one of the few ways to reach it without selling or refinancing the first loan. It can work, but only once you know whether the person on the other side will accept the money.
What using home equity for a down payment or investment means
Home equity is what your home is worth minus what you owe against it. The Financial Consumer Agency of Canada explains that you can often borrow up to 80% of your home’s value, and that for a second mortgage the room is that limit minus your mortgage balance. You take the money, and you put it into something else: a deposit on another property, shares, a business stake, or a gift to a family member.
The loan does not follow the new asset. It sits on the house you already own. If the new purchase goes badly, the loan on your home is unchanged.
When it makes sense
It makes sense when you have a lot of equity, steady income, and a use for the money that you can defend on its own merits. A deposit on a rental that already cash-flows on conservative numbers is easier to defend than a deposit on a rental that only works if prices rise.
It can also make sense for short, clearly planned timing gaps. For example, you might need funds for a few months before a sale closes, with a firm contract in hand. That case sits closer to the bridge loan page than to a long-term investment loan.
If the new asset is expected to earn income, tax may help a little. The Canada Revenue Agency’s interest folio says interest is generally deductible when borrowed money is used with the purpose of earning income from a business or property, so records matter from day one.
When it makes things worse
It makes things worse when the purchase only works if everything goes right. If the new property needs prices to rise, rents to climb and rates to fall, you have added a large bet to a house you live in.
It also goes wrong when the lender will not accept the money. The agency says the minimum down payment normally has to come from your own funds. A buyer who plans a purchase on borrowed deposit money and then finds the lender will not count it may be left with a loan and no mortgage for the new property.
Lastly, it goes wrong when you cannot carry both. You would be paying the first mortgage, the second mortgage and the carrying costs of the new asset. If the new asset is empty for months, your own income is covering all of it.
What it really costs
The first worked example above shows $100,000 borrowed for a year costing $17,000 once interest and fees are added. That is the price of putting money to work, and the new asset has to beat it before it makes you any richer.
The second example uses the minimum down payment figures the agency publishes, and shows how much of your own money a $900,000 purchase asks for. It also shows what it would cost if you tried to borrow that amount. Real lenders may ask for more, particularly for rentals, self-employed buyers or weaker credit files.
Costs the agency lists for borrowing against equity include appraisal, title search, title insurance and legal fees, and you may need to pay a mortgage loan insurance premium. Ask for every figure in dollars. Then run them through the calculator alongside the carrying costs of the new asset.
The risk to your current home
Your current home is the security. The agency warns that if you cannot repay a loan secured on your home, you could face serious consequences, including foreclosure. The new property does not share that risk. The house you live in takes all of it.
The risk grows if you are gifting the money. A parent who borrows against their home to help a child buy has no claim over the child’s property unless a lawyer has set it up. If the child cannot make payments, the parent is the one who owes the loan.
Keep paying your first mortgage on time whatever happens to the new asset. A missed payment can lead to legal action affecting every lender on your title.
Options to try first
Ask a bank whether a HELOC on your existing home would work. The agency says a HELOC can be borrowed up to 65% of the home’s value, and that you only pay interest on what you take. Savings, a family gift made through proper legal channels, a smaller purchase, and a longer saving period are all cheaper than a private loan.
If the goal is to invest rather than buy property, consider whether you would invest without borrowing at all. Investing with borrowed money magnifies losses as well as gains, and the loan is due whatever the investment does.
For a look at how the borrowing options differ, read the HELOC and second mortgage comparison. If the plan is a rental, the page on rental property second mortgages covers what happens once the loan is on the building itself.
How the exit works
Decide how the loan is repaid before you borrow. Choices include selling the new asset, refinancing the first mortgage on your home with a bank, or paying from savings or income. A bank refinance depends on your income and credit at that time and on the appraised value of your home, none of which you control today.
Most private loans are short, and the full balance is due at the end. Ask what the lender charges to extend, and test the plan with the new asset worth less than you paid.
What to ask before you sign
- Whether the lender will accept borrowed money as part or all of your down payment.
- The total cost of borrowing in dollars for the full term, with every fee shown.
- What you will still owe on the last day.
- What it costs to extend.
- What happens to your home if the new purchase falls through.
- The name of the licensed professional and how to check their licence with your provincial regulator.
Ask an accountant about the tax treatment before you borrow, and a lawyer if the money is a gift to someone else. If you want to speak with a licensed mortgage professional in your province, you can check your options. You are free to say no.
Borrowing $100,000 against a home to fund a deposit for a year
Made-up figures only. The home is assumed to be worth $700,000 with a $350,000 first mortgage. An assumed 12% interest-only rate for one year, with an assumed 2% lender fee, 1% broker fee and $2,000 for legal, appraisal and title.
- Interest for one year
- $12,000
- Lender fee
- $2,000
- Broker fee
- $1,000
- Legal, appraisal and title
- $2,000
- Cost to borrow for one year
- $17,000
$100,000 at 12%
2% of $100,000
1% of $100,000
What the minimum down payment looks like on a $900,000 purchase
Uses the minimum down payment rule published by the Financial Consumer Agency of Canada: 5% of the first $500,000 and 10% of the portion above it for homes from $500,000 up to $1.5 million. The 12% second mortgage rate is assumed. Lenders can ask for more.
- 5% of the first $500,000
- $25,000
- 10% of the next $400,000
- $40,000
- Interest for a year if all of it were borrowed
- $7,800
- Minimum down payment on $900,000
- $65,000
$900,000 minus $500,000, times 10%
$65,000 at an assumed 12%
Questions people ask
Will a lender accept borrowed money as my down payment?
Often not, at least for the minimum amount. The Financial Consumer Agency of Canada says the minimum down payment must normally come from your own funds. Rules differ by lender and by type of property, so ask before you rely on a second mortgage to supply the deposit.
Can I borrow from my home to help my child buy their first home?
You can borrow against your own equity, but the debt stays on your house and is yours to repay if your child cannot. Lenders may also have rules about how a gift is documented. Speak to a lawyer and a licensed mortgage professional before money moves.
Is the interest deductible if I invest the money?
It can be, if the borrowed money is used to earn income, but that depends on the investment and your records. The Canada Revenue Agency's folio says the purpose of the use must be to earn income. A tax professional should confirm before you assume a deduction.
What if the new property loses value?
You still owe the loan on your current home, whatever the new property is worth. A fall in value can also make it harder to refinance later. Test the plan by assuming the new asset earns nothing and costs more than expected for a year.
Is a HELOC better than a second mortgage for this?
A HELOC can be cheaper and flexible, but it usually has a variable rate, and a bank has to agree to it. A second mortgage gives you a lump sum with a set term. Compare the total cost of both for the amount you need and how long you need it.