If you’re in the early stages of shopping around for a mortgage solution, you might not be too clear on what you are actually looking for and how to ask for it. This post is a lesson in Canadian mortgage jargon and nomenclature with the hope that you’ll be better prepared to shop around when speaking to your mortgage broker or banker.
Second (2nd) Mortgage, home equity loan and line of credit all can loosely be used to describe the same thing, however each one of them definitely refers to something specific.
WHAT IS A HOME EQUITY LOAN?
Simply put, a home equity loan is any loan or mortgage that has been secured against real property. Secured means that interest in the property has been registered on title via a mortgage or collateral charge.
Types of home equity loans can include:
- First mortgage
- Second mortgage
- Third mortgage
- Line of credit
- Collateral Mortgage
While the term is very broad, in the Canadian mortgage origination industry home equity loans refer to something more specific. A home equity loan refers to a type of mortgage or credit where more importance is placed on the equity available in a borrower’s home rather than the personal covenant or credit worthiness of a borrower.
Borrowers who have difficulty showing strong income or have blemishes on their credit reports can rely on private home equity lenders if they have sufficient equity in their home.
Since banks and institutional lenders have stricter borrower guidelines home equity mortgages tend to be the domain of private mortgage lenders. There are a number of reasons why a borrower requires a private home equity loan/mortgage.
WHAT IS A SECOND MORTGAGE?
Mortgages are ranked (1st, 2nd, 3rd etc) according to the timing of registration. For example…
Home purchased September 1st 2012 for $500,000.
First mortgage secured on September 1st 2012 for $250,000
Second mortgage secured on June 1st 2014 for $25,000
If the first mortgage were paid out in full and discharged, the 2nd mortgage would fall into 1st position. Mortgage lenders can provide postponements to allow positions to be changed or permit new lenders to take a lower position.
The ranking of a mortgage determines how secure a mortgage loan is because upon sale of a property the 1st mortgage lender gets paid out prior to the 2nd or 3rd mortgage lender. This is especially important under power of sale because additional charges can be added to each mortgage diminishing the position of higher positioned mortgages.
For this reason, very few banks or institutional lenders will finance 2nd mortgages. It is a highly specialized area of lending typically dominated by private home equity lenders.
Second mortgages can be very useful to consolidate debts, pay income tax and property tax arrears, bridge financing between two time periods or to stop a power of sale.
WHAT IS A SECURED LINE OF CREDIT?
A secured line of credit is a special kind of credit charge on title which allows credit to be re-advanced or revolving. Unlike a mortgage which has specific repayment terms as determined by its amortization, the line of credit can be advanced and paid back with complete flexibility.
Lines of credit are definitely a type of home equity loan. In fact they are often called HELOC or Home Equity Line of Credit.
Lines of credit can also by a type of 2nd mortgage. Why?
Because a line of credit might be in 2nd position behind an existing first mortgage.
Lines of credit are limited to a maximum amount of 65% of your home’s value. If your line of credit is in 2nd position it cannot exceed 80% loan to value of your home’s value.
For example:
$1,000,000 valued home
$650,000 would be the maximum size of the line of credit, however if there were an existing 1st mortgage of $500,000 then the maximum line of credit would be scaled back to $300,000 due to the 80% LTV limitation.
Banks and A lenders tend to be very strict when it comes to underwriting secured lines of credit, and in general they will only take a 2nd position if they are the lenders who hold the first mortgage as well.
Secured lines of credit are reserved for highly creditworthy borrowers and are rarely, if ever, offered by private home equity lenders.
In general if you are a creditworthy borrower with equity in your home, you would deal directly with your bank or institutional mortgage lender to seek additional financing.
“Knowing is half the battle!” -G.I Joe
Knowing how to ask for something is important. With better knowledge about the difference between a mortgage, 2nd mortgage, home equity loan and line of credit, you should be able to ask for what you want the next time you speak to your mortgage broker.
Looking for a mortgage broker to help you better understand your options? I’ve based my career on better educating mortgage borrowers to understand their options. It’s not just about getting the money but also how to fit it into a plan to pay back the money. Especially when dealing with private financing. I invite you to reach out anytime.
You can contact me here or book a call into my calendar below.
