Second Mortgage

A second mortgage is any new loan that registers a lien behind your existing (first) mortgage on the same property. It uses your home equity as collateral, pays out a single lump sum at closing, and is repaid through fixed monthly installments—usually over 1 – 25 years. Because the lender sits in second position (and therefore faces more risk if you default), interest rates are higher than a first mortgage yet well below credit-card or unsecured-loan levels. Funds can be used for renovations, debt consolidation, tuition, business capital, or virtually any legal purpose.

Why Choose a Second Mortgage Instead of Refinancing?

Refinancing (breaking and replacing your first mortgage) often makes sense when you can secure a much lower blended rate and don’t face a steep prepayment penalty. But a second mortgage may be better if:

• Your first-mortgage rate is far below today’s market and you don’t want to lose it.
• You’re locked into a fixed term with a large interest-rate-differential (IRD) penalty.
• You need funds quickly—second-mortgage approvals can close in 7–10 days versus several weeks for a refinance.
• Your credit score has dropped; a private/alternative second lender can rely on equity strength rather than prime-credit underwriting.

How Much Can You Borrow?

Prime and “A” lenders cap the combined loan-to-value (CLTV) at 80 %. Alternative and private lenders sometimes go to 85 % at higher rates. Example:

• Home value: $600,000
• First-mortgage balance: $350,000
• Max total secured debt (80 %): $480,000
• Room for second mortgage: $480,000 – $350,000 = $130,000

Typical Rates & Fees (Spring 2025)

• Bank/credit-union second: 6.5 % – 8.5 % (good credit, standard home, CLTV ≤ 80 %)
• Alternative (B-lender): 8 % – 12 % plus 1 %–2 % lender fee
• Private mortgage: 10 % – 16 % interest-only, 2 %–4 % lender + broker fee
• Closing costs: appraisal $350, legal/notary $900–$1,200, title insurance $200, provincial registration $75–$150

Eligibility Checklist

• Equity cushion: first + second ≤ 80 % (85 % private)
• Credit score: 650+ for “A” rates; alternative lenders accept 500s
• Verifiable income: salary, self-employed (2 yrs tax returns), pension, or strong rental income
• Property condition: major structural issues or rural/unique homes may lower LTV or require private funds
• Purpose of funds disclosed: risky ventures (crypto, day trading) can be declined

Application Timeline

1. Initial call: discuss goals, equity, estimated property value
2. Document upload: ID, income proof, first-mortgage statement, property-tax bill
3. Credit pull & pre-approval (24–48 h)
4. Appraisal ordered (2–5 days); title search initiated
5. Commitment letter issued; you review rate, fees, amortization, prepayment terms
6. Lawyer/notary signing; second-mortgage lien registered
7. Funding: net proceeds wired to your chequing account (often day 7–10)

Responsible Use Strategies

• Borrow less than the maximum—leave equity for emergencies and market swings.
• Choose the shortest term that keeps payments comfortable; interest costs compound on long amortizations.
• If consolidating debt, close or reduce limits on paid-off credit cards to avoid rebuilding balances.
• Keep an emergency fund for property repairs and to cover payments during income gaps.

Pros & Cons

Pros: Quick funding, preserves low first-mortgage rate, large lump sum at lower cost than unsecured credit, potential tax-deductible interest when invested.

Cons: Higher rate than prime first mortgage, setup fees, risk of foreclosure if payments lapse, renewal risk (rate could rise at term end).

Frequently Asked Questions

How long can I amortize a second mortgage?
Most prime lenders offer 5–15 years; private lenders often write 1-year interest-only terms renewable annually.

Can I pay it off early?
Yes, but a standard penalty (often 3 months’ interest) applies to full discharge before term end. Lump-sum prepayment allowances of 10–15 % per year are common.

Will taking a second mortgage affect renewal of my first?
Your first-mortgage lender will see the new lien on title at renewal. As long as payments are on time and CLTV ≤ 80 %, most renewals proceed smoothly.

Do I need CMHC insurance?
Not on a second mortgage itself. Your first mortgage must still meet insurance or 20 % down rules, and combined LTV cannot exceed 80 % with prime lenders.

What happens if I sell my home?
Sale proceeds first clear the first mortgage, then the second mortgage, then any other registered liens. Remaining equity (if any) comes to you.