Taking out a second mortgage to buy a car might sound unconventional, but it can be a potentially useful strategy for some car buyers in Canada. If you’re a homeowner with enough equity in your home, you may be able to use some of that equity to finance a vehicle purchase.
Let’s take a closer look at this unique financing option to help you determine if it’s right for you.
Key Points
- A second mortgage is a loan taken out against your home equity, using your property as collateral.
- You’re still required to continue paying your primary mortgage while adding another loan via a second mortgage.
- You may be able to access a higher loan amount and get a lower interest rate by using a second mortgage compared to a standard car loan.
- While the rate on a second mortgage may be lower than what you’d pay on a car loan, you could still end up paying more in interest charges with a long loan term.
Can You Use Your Home Equity To Buy A Car In Canada?
Yes, you can use your home equity to buy a car in Canada. You can leverage your home equity for loans, including home equity loans or lines of credit. Then, you can use the funds to cover a variety of expenses, including the purchase of a car.
Types Of Home Equity Loans You Can Use To Buy A Car
If you have a lot of equity in your property, you can borrow a substantial amount of money to purchase the vehicle you’ve been eyeing.
- Home Equity Loan. You can choose to access your equity by taking out a home equity loan, which provides you with a lump sum of money that you repay in scheduled installments over a predetermined period. You can borrow up to 80% of your equity in this way.
- HELOC. A home equity line of credit (HELOC) involves a revolving credit limit that you can dip into whenever you want. Principal payments aren’t required until the draw period ends (up to 10 to 15 years). Until then, you’re only required to make interest payments every month, similar to a personal line of credit from your bank. You can borrow up to 65% equity with a HELOC.
| What Is Home Equity? Home equity refers to the difference between the market value of your home and the remaining balance on your mortgage. In other words, home equity represents the portion of the home that you own. It can increase over time as you make mortgage payments or if the value of the property appreciates. For example, if your home is currently worth $800,000 and you have $300,000 remaining on your mortgage, you would have $500,000 in equity. This represents 62.5% equity ($500,000 ÷ $800,000). Learn more: How To Calculate Your Home Equity? |
Why Use Your Home Equity To Buy A Car In Canada?
Having a lot of home equity can help you pay off important costs. That said, a second mortgage is a major financial responsibility and should not be used irresponsibly. Here are some benefits to using your home equity to buy a car:
Lower Interest Rates
Home equity loans and HELOCs usually come with low interest rates because they’re secured by your home, which is an appreciating asset. Due to this added security, your lender may be more willing to offer you a low rate, making a second mortgage more affordable than a car loan.
This is particularly true for those with bad credit. To qualify for car loans with low interest rates or be eligible for special 0% car financing offers, you need good credit. However, with a second mortgage, you may still qualify for a low interest rate.
Affordable Terms
Most second mortgages can be repaid over 10 – 25 years and come with lower, more affordable payments as a result. Since a standard car loan term is 12 – 96 months maximum, your monthly payments could be higher, depending on the loan amount.
Flexible Repayments
If your second mortgage is in the form of a HELOC, you’ll only be charged interest on what you borrow. Not to mention, you can make minimum or partial payments to avoid penalties.
Higher Loan Amount
A second mortgage can equal a lot more spending money than any car loan, personal loan, or credit card, depending on the amount of equity you have. So, you may be able to afford a much nicer, newer car with all the best features.
Risk Of Using Your Second Mortgage To Buy A Car
The benefits of using a second mortgage to buy a car include the following potential drawbacks:
- Risk Of Losing Your House – Your second mortgage will be secured against your home equity. If you miss too many payments, your lender may repossess your home and sell it to recoup their losses.
- Less Home Equity – By taking out a second mortgage, you’ll be decreasing the total equity in your home. If you sell your house before paying off your second mortgage, you could end up with negative equity (ie. being upside down on your mortgage).
- Vehicle Depreciation – Cars lose value very quickly, especially over the first 5 years, but your home loan won’t. If you use a second mortgage to purchase a vehicle, you’re financing a quickly depreciating asset with a long-term loan.
How Much Can A Second Mortgage Save Me Compared To A Car Loan?
As mentioned, you may be able to get a lower interest rate on a second mortgage compared to a car loan because of the security involved; namely, your home equity. Let’s see how much you can potentially save in interest and monthly payments by using a lower-rate home equity loan compared to a higher-rate auto loan (assuming a 5-year term):
Cost Comparison – Second Mortgage Vs. Car Loan
| Second Mortgage | Car Loan | |
| Loan Amount | $30,000 | $30,000 |
| Interest Rate | 4% APR | 7% APR |
| Monthly Payment | $552.50 | $594.04 |
| Interest Paid | $3,149.74 | $5,642.16 |
| Total Paid | $33,149.74 | $35,642.16 |
In this example, your monthly payments would be ~$41 cheaper per month with a 4% APR on a second mortgage compared to a 7% APR on a car loan (which is roughly the current average rate on a car loan in Canada).
Further, you would spend ~$2,492 less in total interest with a lower rate.
How Do I Qualify For A Second Mortgage To Buy A Car?
To qualify for a second mortgage to buy a car, you’ll need to meet certain criteria:
- Homeownership – You’ll need to own a home to apply for a second mortgage since equity is required.
- Level Of Equity – Generally, the more equity you have, the easier it is to qualify for a second mortgage with a low rate and favourable term. Most lenders will only accept your application once you have at least 20% equity or more.
- Credit Score – A good credit score (over 660) shows you’ve been responsible with prior debt payments and are therefore a less risky borrower. The higher your score is when you apply for a second mortgage, the better your chances of loan approval at an affordable rate.
- Property Value – Your home secures your second mortgage. As such, the lender will want to verify your home’s current value to protect their investment if you default.
- Debts/Liabilities – If you’re in a strong financial position, qualifying for a second mortgage will be easier. However, if you have significant unpaid debt or a large balance remaining on your primary mortgage, it may be more difficult to qualify.
How To Get A Second Mortgage To Buy A Car
To take out a second mortgage and use the funds to purchase a vehicle, follow these steps:
Step 1: Make Sure You Meet The Qualifications
Before applying for a second mortgage, ensure you have enough equity in your home. As mentioned, lenders typically require that you have at least 80% equity in your home to borrow against your home equity.
Step 2: Check Your Credit Score
Your lender will want to ensure your credit score is high enough and will conduct a credit check to find out. You may want to see where you stand as far as your credit score goes before you apply. You can do this quickly and for free using Loans Canada’s CompareHub.
Some lenders may not require good credit and may instead focus more on your equity and the value of your home. If you have bad credit, you may want to go the alternative lender route.
Step 3: Compare Lenders And Loan Offers
Different lenders offer different loan terms and interest rates. As such, you should do some comparison shopping to see where to get the lowest rate and best terms. Using an online loan comparison website, like Loans Canada, can make the comparison process much easier, faster, and more convenient.
Generally speaking, banks charge lower interest rates compared to alternative lenders. However, you typically need good credit to qualify for these lower rates.
Step 4: Apply For The Second Mortgage
Complete the lender’s application and supply all the necessary documents, which may include the following:
- Proof Of Identity — Driver’s license or passport.
- Proof Of Income — Pay stubs or tax returns.
- Home Appraisal — To confirm how much equity you have.
Once you submit your loan application, you’ll need to wait for approval, which can take a few hours, days, or weeks, depending on the lender. Then, you should receive funding shortly after.
Step 5: Use The Funds To Buy The Car
If approved, you’ll receive a lump sum of money or get access to a HELOC. You can then use these funds to purchase your vehicle. You can either cover the entire cost of the car or use the money as a down payment and finance the rest of the vehicle purchase through a car loan.
What’s The Difference Between Buying A Car With A Second Mortgage Vs. An Auto Loan?
A second mortgage or an auto loan are two different ways to finance the purchase of a car. Here are a few key differences between the two:
- Collateral – Car loans and second mortgages are secured loans backed by an asset of value. In the case of a second mortgage, the loan is secured against your home equity. With a car loan, your vehicle collateralizes the loan.
- Repayment Terms – The average car loan has a repayment period of 3 – 5 years. A second mortgage term can last 10 – 25 years. Although longer terms usually lead to lower rates and payments, you will pay more interest and fees.
- Interest Rates – Second mortgage rates usually have lower interest rates than car loans because they’re secured by your home, an asset that usually appreciates in value. This is especially true if you have bad credit.
- Fees – A second mortgage may involve administrative fees, like loan origination and documentation. A dealership will charge you for any services performed before the car is bought, like pre-delivery inspection or maintenance.
- Financing Amounts – If your property has a large percentage of home equity, you could access far more financing than any other financing method (including a car loan) would allow.
Final Thoughts
Using a second mortgage to buy a car can be a strategic move to get a lower rate and secure a higher loan amount. But it comes with significant risks, including the potential to lose your home if you default. Be sure to weigh the pros and cons of using a second mortgage to purchase a vehicle, and consider your long-term financial stability and goals before taking this route.
FAQs About Buying a Car With Your Second Mortgage
Can you get a second mortgage if you have bad credit?
How does the interest rate on a second mortgage compare to a car loan?
Can I use a second mortgage for expenses other than buying a car?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
