What is a second mortgage?
A second mortgage is a second loan secured by the same property, registered after the existing mortgage. Your first lender keeps its position; the second-mortgage lender ranks behind it.
It is a form of private mortgage: the financing generally comes from a private or alternative lender, not from your current bank.
First mortgage vs. second mortgage
The “rank” determines the order of repayment if the property is sold or the lender takes legal action: the first-ranking creditor is paid first, then the second-ranking creditor with what remains. Because it takes on more risk, a second-mortgage lender usually charges a higher rate than a first-mortgage lender.
| First mortgage | Second mortgage | |
|---|---|---|
| Current mortgage | Paid off or non-existent | Kept as is |
| Repayment priority | First | After the first mortgage |
| Usual cost | Lower | Higher |
| Penalty on current loan | Possible if it is paid off | Generally avoided |
Using your available equity
Equity is the market value of the property minus the mortgage balances. For example, a house valued at $400,000 with a mortgage balance of $250,000 has $150,000 in equity. Lenders don't finance all of that equity: they cap total loans at a portion of the value, which varies by lender, property and file.
Example provided for illustration purposes only.
When this option may be considered
- Your current mortgage has a good rate and breaking it would trigger a significant penalty;
- you need a lump sum to consolidate high-interest debt;
- you need to pay off tax or property tax arrears (see urgent funding);
- you have received a 60-day notice from another creditor;
- a full refinance isn't available for now.
How does the process work?
- Review of your situation, your first-mortgage balance and the purpose of the loan;
- estimate of the available equity, often confirmed by an appraisal;
- presentation of your file to second-mortgage lenders and comparison of terms;
- signing with the notary and registration of the mortgage;
- disbursement of the funds, or direct payment of the targeted creditors.
Risks and things to consider
- Two payments: you repay both your first mortgage and the second mortgage. Your budget must be able to handle both.
- Higher cost: the rate and fees on a second mortgage are generally higher than on a first mortgage.
- Short term: plan from the outset how the loan will be repaid or refinanced at maturity.
- Clauses in your current mortgage: some mortgage deeds restrict or prohibit a subsequent mortgage. This must be checked.
- Security on the property: in the event of default, the creditor can exercise its hypothecary rights.
Costs to expect
Depending on the file, costs may include the interest rate, lender fees, brokerage fees, the property appraisal and the notary's fees. Amounts vary from one file to another; they are provided to you in writing before signing so you can make an informed decision.