Overview
A second mortgage in Canada allows homeowners to borrow additional funds by leveraging the equity in a property that already has a primary (first) mortgage. Second mortgages are commonly used for debt consolidation, home renovations, major expenses, or as a down payment for another property. They are distinct from refinancing, as the original mortgage remains in place, and the second mortgage is subordinate in repayment priority.
What Is a Second Mortgage?
- Definition: A second mortgage is a secured loan registered against your property, subordinate to your existing (first) mortgage.
- Equity Requirement: You can typically borrow up to 80% of your home’s appraised value, less the balance on your first mortgage. Some specialized insured programs may allow up to 95% combined loan-to-value (CLTV) in specific cases.
- Types:
- Home Equity Loan: Lump-sum, fixed or variable rate.
- Home Equity Line of Credit (HELOC): Revolving credit, variable rate (usually up to 65% of home value).
How a Second Mortgage Works
- Application: Requires income verification, property appraisal, and legal documentation.
- Collateral: Your home secures both the first and second mortgage. The first lender has repayment priority in case of default.
- Repayment: You make separate payments on the first and second mortgages.
Interest Rates and Terms
| Mortgage Type | Typical Rate | Maximum Borrowing Limit | Repayment Term |
|---|
| First Mortgage | Lowest | Up to 95% CLTV (insured) | 1–30 years |
| Second Mortgage | Higher than first | Up to 80% of appraised value | 6 months–5 years (often 1–3) |
| HELOC | Variable (lower than 2nd) | Up to 65% of appraised value | Revolving |
- Second mortgage rates are higher than first mortgages due to increased lender risk, but still lower than unsecured options like credit cards or personal loans.
- Terms are usually short—often 1 to 3 years.
Fees and Costs
- Appraisal fees
- Legal fees
- Title search and insurance
- Administration fees
- Hefty setup costs compared to a first mortgage
Major Canadian Bank Offerings
- Big banks (e.g., Scotiabank, RBC) generally offer HELOCs as their main second mortgage product.
- Home equity loans (second mortgages in lump-sum form) are typically available through private lenders or specialized mortgage brokers.
- Special insurance-backed programs (e.g., Sagen's Second Mortgage Program) allow higher CLTV for qualifying buyers (often with specific restrictions and only on insured first mortgages).
Provincial Variations
- Ontario: Private and alternative lenders are most active in the second mortgage market, especially for higher-risk borrowers and non-traditional property types.
- Other Provinces: Most rules regarding maximum borrowing (80% of value) and required documentation are consistent, but lender offerings and legal costs may vary.
Government Programs and Regulations
- Borrowing Limit: Federally regulated to a maximum of 80% of appraised property value for second mortgages.
- CMHC/Sagen/Canada Guaranty: Mortgage default insurance is rarely available for second mortgages except in some insured purchase programs (up to 95% CLTV, with strict conditions).
- First-time Home Buyer Incentive: Does not directly apply to second mortgages, but other federal programs may complement your financing.
First-Time Homebuyer Considerations
- Second mortgages are generally not used by first-time buyers due to higher costs and the need to have sufficient equity.
- Alternative: Consider first-time homebuyer programs, such as the Home Buyers’ Plan (HBP) or government-backed insured mortgages, for better rates and lower down payments.
Comparison Table: Second Mortgage vs. Other Home Equity Options
| Product | Maximum Loan Amount | Rate Type | Flexibility | Typical Use Cases |
|---|
| Second Mortgage | Up to 80% of appraised value minus 1st | Fixed/Variable | Lump-sum, short-term | Debt consolidation, major expenses |
| HELOC | Up to 65% of appraised value | Variable | Revolving credit | Ongoing access, renovations, investments |
| First Mortgage Refinance | Up to 80% of appraised value | Fixed/Variable | Lump-sum, long-term | Lower rates, reset amortization |
Next Steps & Recommendations
- Assess your equity and borrowing needs before applying for a second mortgage.
- Compare lender offerings: Use platforms like theratefinder to find and compare the most competitive second mortgage rates and products from top Canadian lenders. theratefinder offers a streamlined multi-step application for residential, commercial, and construction loans. Start your personalized application at theratefinder.ca/onboarding.
- Consult a mortgage broker or advisor for tailored advice, especially for complex financial situations or if you have less-than-prime credit.
- Review all costs and risks: Understand the higher interest rates, fees, and the risk of foreclosure if you default on either mortgage.
Summary
Second mortgages in Canada provide a way to access home equity for major expenses, but come with higher rates and fees than first mortgages. They are best suited for homeowners with significant equity and a clear repayment plan. Always compare options and consult with mortgage professionals or use theratefinder to secure the best rates and structure for your needs.