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Access the equity in a property
Access the equity in a property

Unraveling the Mortgage Maze: Refinancing, HELOC, and Second Mortgages Explained

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Written by Support
Updated over a week ago

As time has flowed, so too has the equity in your property grown. Whether your property is a cozy first home or an idyllic vacation cottage by the lake, you've been steadily building up equity since your initial purchase.

Now, you're ready to leverage this accumulated wealth, seeking out opportunities to optimize your financial landscape. In this journey, three options often rise to the forefront: refinancing your existing mortgage, adding a Home Equity Line of Credit (HELOC), or securing a second mortgage. But what exactly are these terms, and how do they differ from each other?

Join us as we navigate through these options, tailored specifically to the Canadian mortgage framework.

Available Equity on a Perch property

If you haven't already added your property to Perch you can start the process to renew your Mortgage by starting a Switching Plan from your Perch Dashboard. Alternatively, you can add your property details and mortgage to your Perch account by visiting the Properties page and then start your Switching Plan from there.

Perch can help track property value over time, analyze your available equity and reveal insights into how you could save on your monthly payment through our switch savings feature.

The Different Ways To Refinance

Refinancing Your Mortgage

To put it simply, refinancing your mortgage means breaking your current mortgage agreement and starting a new one. The new mortgage pays off the balance of the old one. The remaining funds, if any, can be used for a variety of purposes such as home renovations, consolidating debts, or even making a big-ticket purchase.

Why would someone refinance? The reasons can be manifold. Maybe interest rates have dropped significantly since you took out your mortgage and you want to take advantage of these lower rates. Or, you may need to free up some cash for a significant expense. It's worth noting that in Canada, refinancing usually comes with penalties for breaking your current mortgage agreement early, so it’s important to weigh the benefits of refinancing against these costs.

Home Equity Line of Credit (HELOC)

A HELOC is like a credit card, with your home as the collateral. You build up equity in your home as you pay off your mortgage - that's the portion of your home you truly own versus what you still owe on your mortgage. A HELOC allows you to tap into this equity and borrow money up to a certain limit, often up to 65% of your home's appraised value in Canada.

Here's the good news: acquiring a HELOC does not require you to restructure or refinance your existing mortgage. Instead, it's added onto your property as a separate facility, which can give you considerable flexibility.

The versatility of a HELOC is one of its main attractions. You can borrow as much as you need, when you need it, and repay it on flexible terms. Interest rates on a HELOC are typically lower than credit cards but may be slightly higher than mortgage rates. They're usually variable, meaning they can fluctuate over time.

When it comes to repaying your HELOC, it's important to note that while you can make interest-only payments during the 'draw period' (which typically lasts 5 to 10 years), a 'repayment period' will eventually kick in. This period can last around 10 to 20 years, during which you’ll need to repay both the principal and the interest. If you sell your home, you'll typically be required to pay off the HELOC in full.

It's also worth noting that if you fail to repay the loan, the lender has the right to sell your home to recover their money, so it's crucial to only borrow what you can afford to pay back. As with all financial decisions, it's wise to consult with a professional to understand the full implications of taking out a HELOC.

Second Mortgage

A second mortgage, as the name suggests, is a secondary loan taken out on a property that already has one mortgage. It allows you to borrow against your home’s equity without breaking your existing mortgage contract. However, because it ranks behind your primary mortgage in terms of repayment priority, the interest rates on second mortgages are typically higher than those on the primary mortgage or a refinance.

Second mortgages can be useful for homeowners who need access to a large sum of money without refinancing their primary mortgage. It's often used for big-ticket expenses like home renovations, education costs, or to consolidate high-interest debts.

The Bottom Line

Refinancing, adding a HELOC, or securing a second mortgage each have their own pros and cons, and the best choice largely depends on your individual circumstances and financial goals. Always consider factors such as interest rates, fees, your financial stability, and your future plans before making a decision.

Remember, it's always wise to consult with a mortgage professional to fully understand your options and make the best decision and Perch is here to help. We're your friendly neighbourhood mortgage broker with superpowers. Our platform is designed to help you navigate these choices and find the best solution for your needs.

Remember, owning a property is more than just a milestone; it’s a journey. And as with any journey, it helps to have a trusty guide by your side. So let's explore your options and make your journey a successful one together.

Next Steps

To get started, please add your property on Perch and then from within your property start a refinancing plan to access the equity in your property. Your advisor will help you choose between refinancing your existing mortgage, a second mortgage or a HELOC.

We've written an entire article on the refinancing process with Perch and highly recommend checking it out to learn more about how we walk you through the entire process end to end.

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