While owning a home is a great way to build equity, the equity is of little use if you can’t access it.
As more Canadians look for ways to renovate their homes, improve their net worth and take that much-needed vacation, the mortgage industry has responded by introducing an influx of flexible mortgage products and making traditional products more accessible to more homeowners.
Second mortgages, refinancing and Home Equity Lines of Credit (HELOC) are just a few options available on the market – and they’re enough to make any homeowner’s head spin.
The product you choose depends on your reasons for acquiring the extra cash – for example, is it for a one-time event such as a wedding, or an ongoing investment strategy? Your product choice will also depend on the amount of equity you’ve already built in your home.
The decision is further complicated if you opt to take advantage of one of these products in the middle of your mortgage term. Lenders and banks occasionally charge hefty penalties and interest rates if you don’t choose your products wisely.
So which option is right for you?
When it comes to looking out for the best interests of her clients, Paula Roberts frequently relies on HELOCs.
The Unionville, Ont.-based mortgage agent with Mortgage Intelligence believes there is nothing else on the market that can cater to her clients’ financial needs – both today and down the road – while offering them extreme flexibility.
She likes the fact that the loans allow homeowners to reserve a stash of low-interest, easily-accessible credit for life’s unexpected occurrences.
“The client doesn’t always know they need it now,” she says. “But down the road – when the kids are going to college, or their house needs some renovations – it could save them a lot of trouble in refinancing. If they don’t use it, on the other hand, it doesn’t cost them anything.”
A HELOC is quite different than a Home Equity Loan, although the two terms are often mistakenly interchanged. For starters, a home equity loan might be the best fit if you plan to use the money in a lump sum for a one-time occasion, as the interest rate and monthly payments are fixed, so you can budget accordingly.
A HELOC might be a better fit if you need money periodically and not all at once. These products usually consist of a revolving line of credit that automatically rebalances and can be structured along with the mortgage. Because the line of credit is secured to your home, the interest payment is significantly lower than a regular line of credit.
The revolving portion of the loan acts like a typical line of credit – you receive monthly statements and can draw down at any time, as well as make monthly payments on it. As the fixed term mortgage is paid down, the available revolving limit increases.
Because many clients don’t feel comfortable having a large loan registered against their home that could rise if variable rates increase, many providers offer the option of locking portions of their loan in, either to a fixed term or an adjustable rate mortgage (ARM).
“A customer can have an ARM below prime, a five-year fixed and a 10-year fixed, and have a little bit left over to draw down whenever they need to,” says Andrew Kuyper, director of marketing and operations for Merix Financial, a non-bank lender. “There are various reasons for this. Some people want a designated amount for investments and our monthly statements allow for independent record keeping.”
The statements allow clients to identify what amount of their loan is in the revolving portion and enables them to write off the interest – one of the reasons many homeowners are using this HELOC product for investment strategies such as the Smith Manoeuvre and other tax deductible mortgage plans.

If you have a significant amount of equity built into your home – either you’ve owned it for a while, or put down a significant down payment upon purchase – this may be your best option.

Some lenders, such as Home Trust, another non-bank lender, will allow you to add a HELOC to your existing first mortgage at any time – regardless if it’s from another bank or lender. In fact, 80 per cent of Home Trust’s clients that take advantage of its Equityline VISA HELOC product (a Visa Gold card with chequeing privileges that’s tied to your home’s equity) have a first mortgage with a bank.

Although you do have to pay for an appraisal fee, which goes for approximately $250, and legal fees, which can equate to about $500, it’s a one-time event. You don’t have to pay any renewal fees for the life of HELOC – even when your mortgage term is up.
Refinancing your existing mortgage in the middle of a mortgage term can result in huge penalties – but there are ways around them. Often you merely have to return to your existing lender and opt to ‘blend the rates.’
For example, say your original mortgage is $250,000 at a 5.2 per cent interest rate. Two years into your five-year term, you realize you’d like to add an additional $50,000 – so you return to your lender and acquire a $50,000 mortgage at the current three-year rate of 5.9 per cent. If you opt to blend the rates, you’ll have a $300,000 mortgage at 5.317 per cent that will mature in three years.
Refinances are popular with homeowners who have accumulated a large amount of high interest debt – such as credit card debt – and have calculated that it will save them money in interest charges if they tie it all into their mortgage and pay it off at a much lower rate. Although the move does have its advantages, there are risks involved.
“One risk is that you’re reducing the equity in your home,” says Walter Koziej, a mortgage broker with Mercury Mortgages Inc. in Toronto. “But if you need the funds – for whatever purpose – tapping into your home equity may be the cheapest way.”
While this strategy makes sense for some, there is a catch. You must have built enough equity in your home to warrant a refinance. After all, a bank will not offer you a $300,000 mortgage on a home that’s still only worth $250,000.
This strategy also doesn’t work if your first mortgage is at an exceptionally low rate in comparison to the current rate. In this case, it will likely save you more money if you acquire a second mortgage that matures at the same time as your first, at which point you can refinance with no extra costs.
Second mortgages
Second mortgages are no longer limited to the financially-troubled – they’re also a great tool for individuals who would like to access some extra money, but don’t have the necessary equity built up to refinance their existing mortgage or obtain a HELOC.
Because they carry a higher risk to lenders, these products often come with a higher price tag – typically 13% interest – and should be used only in select situations.
“I would suggest a second mortgage only if your first mortgage is at a super low rate, or if the second mortgage is for investment purposes,” says Marian Clendenning, a mortgage agent with Mortgage Intelligence in Unionville, Ont..
Don Bayer, president of MonsterMortgage.ca, Toronto, agrees, adding that you should only take on a second mortgage if you are certain you can pay it off in a reasonably short period of time – say, two or three years.
If you have exceptional credit, you might be able to acquire a second mortgage through a bank – although if the combined values of your first and second mortgages exceed 80 per cent of your property value, you will have to pay mortgage default insurance on top of the high interest rates.
In this case, it might make more sense to go through a private lender, where mortgage default insurance isn’t required. Although the private lender will likely charge a higher interest rate, it might amount to less in the long run.
In the end, Bayer says borrowers should be very careful about using second mortgages. “I only recommend them to people who don’t qualify at the banks. There are very few cases where a client should take a second mortgage at 12 to 13 per cent.”
It’s important for homeowners to do their research when deciding whether a second mortgage – or other mortgage product – is right for them. Your local mortgage broker could be an excellent secret weapon in this arena, as pricing can vary widely depending on your situation and the mortgage product involved.
“There are many different products out there and one should carefully read their mortgage agreement in order to know what exactly they are getting, especially if it comes to pricing and possible penalties,” says Koziej of Mercury Mortgages Inc.
Product costs
HELOC (Home Equity Line of Credit)
A HELOC is typically made up of two components – a fixed rate component and a variable rate line of credit.
In the case of FirstLine’s Matrix Mortgage, the rate of the fixed component depends on the chosen term (as of June 20, the uninsured 5-year fixed was 6.04%). The line of credit component is available at CIBC Prime (4.75%).
While the first component is paid off like a regular mortgage, the line of credit requires interest-only payments. You can also pay the line of credit off at any time without penalties.
It is possible to refinance before the maturity of your mortgage term without forking out early payout penalties – you just have return to your existing lender and opt to blend your mortgage rates.
This means averaging the rate of your existing first mortgage with the current interest rate of your desired term. This allows you to maintain one mortgage payment, and the term will expire at the same time as the original.
Second Mortgage
A second mortgage is an ideal option if you don’t want to blend your mortgage rates (because your existing rate is just too low) or if you don’t have significant equity built into your house.
Second mortgages are a short-term strategy, however, as they can range in price from 9% to 22%.
They are available through banks although, if your first and second mortgages combine to make up more than 80% of your home’s value, you’ll have to pay mortgage default insurance. In this case, you might want to check out the offerings of a private lender.
Break costs
Refinancing your mortgage or obtaining a HELOC before the end of your existing mortgage term can end up costing you – and not only in higher interest rates. If you opt to go with a new lender – or choose not to blend your interest rates – the costs can add up:
Type of fee
Early payout
Three months’ interest to thousands of dollars depending on whether it’s a variable rate or an interest rate differential
Dependent upon the insurer and loan amount
Home equity loan or HELOC?
If you’re confused as to which product will better suit your needs, ask yourself the following questions:
Q: Do I need the money in a lump sum or in several instalments?
A. If you need it in a lump sum, you should lean toward getting a home equity loan. If you need the money in instalments, lean toward getting an equity line of credit
Q. Is it for a long-term or short-term purpose?
A. If the money is to be spent on something that will last a long time, such as a roof or a car, an equity loan might be better. If the money is to be spent on something that won’t last long, such as a semester in college or a wedding and reception, you should think about getting an equity line of credit.
Q. How much of a monthly payment can I handle?
A. A home equity loan requires you to pay principal and interest every month for the life of the loan. A home equity line of credit allows you to pay just the interest for several years, if that’s what you want to do. It’s a whole other question whether it's a good idea to pay only the interest, and not the principal, for an extended period.

Our mortgage calculator can provide a more detailed picture as to how much you can borrow over how long.
Q. Would a line of credit tempt me to use the money carelessly?
A. Naturally, if you answer this in the affirmative, you should consider getting a home equity loan because you pay off the principal and interest over time, and it’s not a revolving credit account.
Q. Does a variable rate both me?
A. A home equity line of credit has an adjustable rate which most likely changes every time the Bank of Canada raises its interest rate. If you don’t like the idea of having a rate that could rise every time the Bank of Canada raises its rates, you should consider getting a home equity loan, which has a fixed rate.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate