How To Refinance A Second Mortgage

As a homeowner, it’s always a good idea to understand all the ins and outs of mortgages, including how to refinance both a first and a second mortgage. 

If done properly, refinancing can help you save money in interest, lower your monthly payments, and even cash out on some equity to fund a big purchase. Refinancing your second mortgage can also help you renegotiate the term of your mortgage or consolidate your first and second mortgages into one loan. 

Let’s go into more detail about how to refinance a second mortgage.

Key Points

• You may be able to refinance your second mortgage if you’re looking to get a lower rate, access your home equity, or change your loan term. 
• There are costs associated with refinancing your second mortgage, so do the math to make sure any benefits of refinancing offset the costs.
• To be eligible to refinance your second mortgage, you’ll need to have good credit, at least 20% equity in your home, and a low debt-service ratio.

Can You Refinance A Second Mortgage In Canada? 

Yes, you can refinance your second mortgage. When you refinance, you’re taking out a new mortgage to replace an old one. You can do this with a second mortgage as well. 

In this case, you would take out a second mortgage, then use the funds from this loan to pay off your old loan. 

How To Refinance A Second Mortgage

If you decide to refinance your second mortgage, follow these steps: 

Step 1: Understand The Costs Of Refinancing

Before you make any decisions about refinancing your second mortgage, take some time to determine if refinancing is in your best financial interests. 

Refinancing usually involves several fees and closing costs. In general, it can cost between 3% to 6% of your loan. As such, it’s important to calculate all associated fees to see if your savings outweigh the costs. 

Moreover, you should look at your financial situation to figure out what it would be like if you were to refinance your second mortgage. Will you still have enough liquid cash available to you to pay your bills and other daily expenses? Will your savings take a big hit?  

Step 2: Find Out If You Qualify For Refinancing

This step goes hand in hand with step one, make sure you’re in a good financial position. For starters, you should get a copy of your credit report, which you can do for free using Loans Canada’s CompareHub tool. If your credit report is less than favourable, you might consider working on it for a while before you decide to refinance your mortgage. 

This is because lenders tend to base interest rates on your creditworthiness. In general, lenders will evaluate three main factors to see if you’re eligible for refinancing: 

• LTV ratio – Lenders will use your equity to calculate your loan-to-value (LTV) ratio, which is a measure of the loan amount relative to the property value. Your LTV ratio is calculated by dividing the amount you owe on your mortgage by the current value of your home. Lenders typically require your LTV ratio to be 80% or lower. However, some lenders are willing to lend even if you have 90% or higher.  
• Credit score – As mentioned, lenders will check your credit score as a way to determine your creditworthiness. The higher your score, the more likely you’ll qualify for a lower interest rate, which is one of the main reasons Canadians refinance. 
• Debt – Your lenders will check your debt-to-income ratio to determine if you can handle more debt. This ratio measures your debt relative to your income. In other words, it shows how much of your income is spent on your current debt. If the ratio is too high, then you’re likely to get rejected for a loan or will be charged a higher interest rate. 

Step 3: Find A Lender

Ask your lender if they’re willing to refinance your second mortgage with a lower interest rate. If they are, you may be able to avoid certain fees. However, if your lender is not willing to refinance your second mortgage, then you’ll need to find another lender who is. Make sure you compare different lenders and their rates before you make your final decision. 

Step 4: Gather Your Paperwork

Once you’ve chosen which lender is the best match for your refinancing needs, you should get all the required documents needed to apply. In general, you’ll need documents that will allow your lender to evaluate your debt, assets, income, and equity. 

This can include your bank statements, tax returns, pay stubs, and a letter of employment. Organizing your paperwork will help the application process go more smoothly. 

Step 5: Review And Sign Your Agreement

Once you’ve applied and have been approved for a refinance on your second mortgage, you’ll need to read through the contract and make sure you understand all the terms and conditions before you sign anything. This may be done either online or in person. Regardless, make sure all terms of the agreement are clear to you before you sign the contract. 

Documents Required To Refinance A Second Mortgage

As mentioned, you’ll be required to submit various documents to your lender as part of the loan process. These documents may include the following: 

• Personal identification – Government-issued photo IDs, such as your passport or driver’s license, are typically used to verify your identity.
• Income verification – Documents such as your pay stubs, bank statements, or tax returns will be required to verify your employment and income details. 
• Statement of assets and debts – Any statements that detail the value of your assets and debts may be requested by your lender so they can calculate your debt-to-income ratio.
• Documents detailing your collateral – You’ll also need to provide details about the property or collateral you’re using. 
• Mortgage details – Lenders will also require documents that show your remaining mortgage balance.
• Other documents – You may also need to provide your property tax payments and home insurance papers upon request.

Best Time To Refinance Your Second Mortgage

Refinancing a second mortgage makes the most sense in the following circumstances:

Your Credit Score Has Improved

If your credit score has significantly increased since taking out a second mortgage, you could qualify for a lower rate if you refinance. A lower interest rate can help you save thousands of dollars over the loan term.

Interest Rates Have Decreased

If interest rates have fallen since you’ve first taken out a mortgage, then refinancing makes sense. You’ll be able to get a lower rate which, in turn, means you won’t pay as much interest and will ultimately save you money.

You Want To Change Your Loan Terms 

By refinancing, you’ll be able to renegotiate your loan terms. For instance, you may want to extend or shorten your amortization period. While extending your loan will help shrink your mortgage payments, shortening your loan will help you pay off your loan faster and save you on interest.

You Want To Switch To A Fixed Rate

• If you’re currently working with a variable rate but would like to switch to a fixed rate due to rising interest rates or a financial change, then refinancing can be a solution. 
•  If you’re thinking of applying for a loan because you need extra cash to cover a big expense, then refinancing your second mortgage can help you gain access to your equity. 

When Is Refinancing Not A Good Idea?

While there are situations when refinancing a second mortgage may be a good idea, there are times when it might not make sense:

• Your current mortgage rate is low – If the refinance rate would be higher than the rate you’re currently paying on your existing mortgage, then refinancing would make little sense. Especially now when rates are quite high, it would be very unlikely for you to secure a lower rate today compared to what you were able to lock in when you first took out your second mortgage. 
• Early repayment penalty fees are high – Breaking your mortgage early by refinancing could come with expensive early repayment penalty fees, which could cost you thousands of dollars. If these additional costs are much higher than any potential savings, it may not be worth refinancing. 

Types Of Second Mortgages

Second mortgages involve borrowing against the equity in your home. The two most popular ways to do that are through a home equity line of credit (HELOC) or a home equity loan. 

HELOCs

A HELOC is a line of credit that allows you to borrow against the equity in your home. Like a credit card, you’re able to withdraw up to a specific credit limit for a set period of time (usually up to 10 years). This is known as the “draw” phase. During this period, you’ll be required to at least pay the interest amount each month.

Once the draw period ends, you’ll have to make payments toward your interest and principal. This is known as the “repayment” phase, which typically lasts much longer than the draw period, up to 20 years. Moreover, you won’t be able to borrow any more money once the draw period ends. 

Home Equity Loans

A home equity loan is another way to borrow money against your home equity. Like a regular loan, you’ll receive a lump sum of money, which you’ll have to pay back in installments plus interest. Rates are typically fixed and terms are often longer than a HELOC, which may make a home equity loan more affordable.

Additional Reading

What Is An Interest-Only Mortgage?

How A Blended Mortgage Can Save You Money | Blend And Extend, Blend To Term

Your Mortgage Refinancing Appraisal Checklist

Bottom Line

To successfully refinance your second mortgage, here are the main points you should remember…

• Make sure refinancing will be financially beneficial to you
• Make sure that your current financial situation is in a good place
• Always check with the lender who holds your second mortgage first
• Always try to refinance at a lower interest rate
• Double-check all paperwork and documents

If you follow these steps and choose a lender that best suits your current financial situation, then you should have no trouble refinancing your second mortgage and reaping all the benefits you hoped for.

Refinancing FAQs

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.