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Everything You Need To Know About Second Mortgages In Canada

As you make each mortgage payment, you are building equity in your home. Your home equity is also built by the increased value of your home over time. Your home value can increase in many ways including doing home improvements and upgrades, or a hot real estate market.

As you build equity in your home, you can access the money available in your property in a few different ways, including:

What Is A Second Mortgage?

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A second mortgage is simply another type of loan you secure with your property. It is registered in the second position since there is a first mortgage currently registered on the title of your home. This means it has a second priority to the primary mortgage when being paid out when you sell your home or refinance your mortgage.

Second Mortgages Explained

When you are considering taking out equity from your home, refinancing your first mortgage may come with some challenges, such as:

In these situations, where you may not qualify to refinance your mortgage, the only available option to access your home equity will likely be a 2nd mortgage.

How Much Can You Borrow?

Use Our Quick Quote Tool To See How Much Equity You Can Access As A Second Mortgage, With Monthly Rates & Monthly Payments!

How Does A Second Mortgage Work?

Second mortgages operate much like your initial mortgage but are generally more forgiving regarding income and credit stipulations typically required by banks.

1. Basic Structure:

  • Term, Interest, and Payments: Like the primary mortgage, second mortgages encompass a designated term, interest rate, and monthly payment, complete with closing costs and often, pre-payment penalties.
  • Interest-Only Payments: Typically, second mortgages are not amortized, implying the monthly payments primarily cover only the interest, leaving the principal balance unaffected. However, borrowers can opt for an amortized mortgage to gradually reduce the principal amount.

2. Term Duration:

  • Variable Terms: The tenure of second mortgages can fluctuate, extending from as short as three months to a year, with many lenders predominantly offering a 12-month term.
  • Temporary Solution: It’s pivotal to perceive a second mortgage as a provisional remedy, not a protracted financial strategy, due to its short-term nature.

3. Pre-payment and Penalties:

  • Breaking Penalties: Terminating a second mortgage within its term usually incurs a penalty equivalent to three months of interest payments.
  • Restricted Lump-Sum Payments: It is common for second mortgages to impose restrictions on making lump-sum payments towards the principal amount, however the full principal balance can be paid in the middle of the term with a 3 month interest penalty, traditionally.

4. Flexibility and Accessibility:

  • Looser Requirements: Second mortgages distinctly shine in their relaxed income and credit requirements, opening doors for those who might struggle with stringent bank criteria.
  • Diverse Utility: They serve as a versatile financial tool, assisting in debt consolidation, home improvement projects, or serving as a financial cushion during turbulent times.

5. Caution and Consideration:

  • Use Wisely: Given the flexibility and ease of access, it’s crucial to approach second mortgages judiciously, utilizing them responsibly to navigate financial constraints without spiraling into prolonged debt.
  • Weigh the Costs: It’s essential to meticulously evaluate the involved interest rates, terms, and potential penalties, ensuring the chosen second mortgage aligns with one’s financial landscape and is a prudent choice in the long run.

Second Mortgage Rates

The rate of interest assigned to a second mortgage is influenced by multiple factors, each playing a critical role in determining the overall cost of the loan.

1. Key Determinants of Interest Rates:

  • Equity in the Home: The residual equity in your property significantly impacts the interest rate of your second mortgage. More equity usually translates to lower rates.
  • Loan Amount: The sum you intend to borrow also influences the rate, with larger amounts often incurring higher rates due to the increased risk.
  • Credit Score of the Borrower: Your credit score acts as an indicator of your financial reliability, influencing the interest rate you are offered.

2. Risk and Equity-centric Approval:

  • Equity-Based Approval: Second mortgages are primarily approved based on the available equity rather than income or credit, amplifying the lender’s risk, given their reliance on the property’s value and market conditions.
  • Risk Compensation: To mitigate the inherent risk, lenders may assign higher interest rates, ensuring adequate compensation in the event of a market downturn or property devaluation.

3. Influence of Credit Score on Rates:

  • Credit as a Rate Indicator: Although income and credit are not approval prerequisites, they play a crucial role in rate determination. A robust credit score often results in favorable rates due to the perceived lower risk.
  • Implications of Poor Credit: Conversely, a tarnished credit history may lead to elevated rates as it signals a higher probability of default to the lenders.

4. Variable Rate Spectrum:

  • Rate Range: Interest rates for second mortgages can vary widely, typically ranging from 6.99% to 10.99%, contingent on the associated risk.
  • Risk and Rate Correlation: Lower risk to lenders generally correlates with lower interest rates and vice versa. The riskier the loan appears, the higher the rate assigned to compensate for potential defaults.

5. Discovering Your Rate:

  • Utilizing Calculators: Employing a second mortgage calculator can be an invaluable tool in estimating the potential interest rate based on your individual circumstances, providing insight into the feasible cost of the loan.

6. Responsible Borrowing:

  • Informed Decision-Making: Understanding the intricate components influencing second mortgage rates enables borrowers to make well-informed and responsible decisions, aligning their choices with their financial capabilities and objectives.
  • Risk Assessment: It’s crucial for potential borrowers to assess the associated risks meticulously, weighing the benefits against the implications of higher interest rates, ensuring a balanced and sustainable financial approach.

In essence, the intricacies of second mortgage rates are shaped by a multitude of elements, including equity, loan amount, and credit score, each contributing to the risk landscape perceived by the lender. By embracing informed, responsible, and strategic borrowing, potential borrowers can navigate the complexities of second mortgage rates, securing solutions that harmonize with their financial trajectories and aspirations.

Second Mortgage Payment

In the realm of second mortgages, it’s essential to grasp how payments work. Generally, these payments predominantly consist of the interest accrued, which is a different structure compared to primary mortgages.

Interest-Only Payments

Payments on a second mortgage are usually designed to cover only the interest accruing on the loan amount. This means, throughout the term of the loan, the payments made are not reducing the original borrowed amount (principal), but merely the interest on it. Opting for an interest-only payment can result in lesser financial burden each month but requires a solid strategy to manage the unpaid principal in the long run.

Monthly Payment Schedule

The predominant offering by second mortgage lenders is a monthly payment schedule, requiring borrowers to fulfill a payment obligation each month. This consistent and predictable pattern allows for easier budgeting and financial management, helping borrowers to integrate the repayment seamlessly into their financial routines without unwanted surprises.

Utilizing Second Mortgage Calculators

For a clearer understanding of what the interest rate and monthly payments could look like based on individual circumstances, leveraging a second mortgage calculator is highly recommended. It provides an approximate insight into potential monthly outflows, assisting in determining the affordability and impact of the second mortgage on one’s finances. This tool is crucial for those wanting to strategize their finances effectively and avoid any unintended financial strains.

Importance of Proper Calculation and Planning

Understanding and calculating the prospective payments correctly is crucial. It not only aids in avoiding any unexpected financial hurdles but also ensures that the second mortgage aligns well with one’s financial landscape and objectives. It empowers borrowers to make well-informed decisions, optimizing the benefits derived from the second mortgage while mitigating potential risks.

Have Questions About Second Mortgages?

Call us today to speak to a licenced mortgage broker.

Step-By-Step Guide On Getting A Second Mortgage

Of all types of mortgage loans, this is the easiest type of loan to qualify for. The approval is mainly based on the equity available in the home. Homeowners who have a bad credit score or a high amount of debt can get approved since the approval is based on the equity in their home.

The Second Mortgage Process Is As Follows:

  1. First, an appraisal must be ordered from an accredited appraisal company, confirm the fair market value of the property.
  2. Next, a lender will need to confirm the balance of the existing mortgage registered on the home.
  3. Next, given there is sufficient equity (20% or more), the homeowner would choose the desired loan amount based on the equity available, up to 85% or 95% of the home’s value.
  4. Once all of the above is confirmed, a mortgage application will be sent to mortgage lenders for review.
    Upon the lender’s review and approval, a mortgage commitment for will be issued
  5. Once the approval is issued, the homeowner(s) would review the approval and terms and accept the lender’s offer.
  6. Once the approval documents are signed, the lender will issue the final registration documents to the borrower’s lawyer.
  7. When the homeowner’s lawyer receives mortgage documents, they will make an appointment to meet with the homeowner(s) to sign the final documents, and collect any outstanding documents required by the lender.
  8. Once conditions the lender sets for the lawyer to satisfy, have been met, the lender will disburse the loan amount to the borrower’s lawyer.
  9. Finally, the lawyer will write a cheque or direct deposit the remaining balance of the loan to the homeowner’s account.

Advantages & Disadvantages of Getting A Second Mortgage

Before taking out a 2nd mortgage loan, it’s important to understand the pros and cons of second mortgages. This type of loan comes with many pros and cons, and is suitable for most situations.

All homeowners have different and unique situations. What may be a disadvantage to some, may be an advantage to others.

See the list of advantages and disadvantages of getting a 2nd mortgage.



Common Uses Of A Second Mortgage

All homeowners have unique circumstances where they need to tap into their equity to access money.

Lenders don’t put any restrictions on how you can use your money. That said, it’s important to use your second mortgage loan wisely.

Below is a list of some common uses of a 2nd mortgage:

  • Emergency funds
  • Paying for education
  • Medical expenses
  • Investment property
  • Business investment
  • Bridge loan
  • Pay off high-interest credit cards and loans
  • Pay mortgage arrears to stop power of sale process
  • Pay CRA income tax arrears
  • Pay property tax arrears

Need To Take Out A Second Mortgage On Your Home?

Everyones situation is different and it’s important to do your research on 2nd mortgages before proceeding with the loan. While there is a lot to learn as a homeowner, it’s a good idea to get the knowledge and experience of a licenced mortgage broker.

Our expert mortgage brokers are here to help guide you to financial success. Contact us today to discuss your 2nd mortgage needs and get unbiased mortgage advice.

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Bad Credit Approved


All credit types and credit scores accepted.

No Income Verification


No income verification required for accessing your equity.

Approved On Equity


All approvals are based on the equity and your property alone.

See How Much Equity You Can Access

Second Mortgage Process In Canada

Getting a second mortgage is quite simple. Second mortgage approvals are based on equity, not credit or income.

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Why Choose Us For Your Second Mortgage?

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We take pride in taking the time and effort to match up every individual homeowner and homebuyer with the best mortgage financing options and rates. With access to more than 200 participating mortgage lenders, there are mortgage solutions for all types of borrowers. We listen and understand your mortgage and real estate goals, and find the best mortgage terms tailored to your specific goals to save you thousands of dollars on your new mortgage.

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