Getting a Second Mortgage in Canada: What Are the Rules?

Did you know that, in Canada, it is possible to get a loan that is leveraged against a property that already has a pre-existing mortgage loan?

This loan, known as a second mortgage, can typically be taken out by any homeowner as long as certain criteria are met. Since this type of loan also involves using your house as collateral, when you receive it, you technically hold two mortgages on the same property at the same time. 

The main benefit of getting a second mortgage is gaining access to the equity you have established so far in your home in the form of either cash or credit, which you can use for various purposes, such as consolidating your credit or paying for home renovations. 

Generally, a second mortgage involves receiving a one-time lump-sum payment at the beginning of the loan period, and then paying this loan off in increments over a set period.

Alternatively, if you choose a home equity line of credit (HELOC) instead, which is another way to access your home equity, you would receive a revolving loan. The lender would agree to the loan up to a certain amount during an agreed-upon period, but this amount could be replenished as you pay it off (just like a credit card).

How can you get a second mortgage?

If you are interested in getting a second mortgage, you must go through an application process with an official lender just as you would for a primary mortgage. However, the qualifying process is a little different for this type of loan. 

While it is typically an option to go through this process and apply for the loan with the same lender as your initial mortgage, it is also possible to seek out a different lender if you can find a better interest rate elsewhere.

When you apply for a second mortgage, the lender will look into various factors before making a decision about their approval of this loan. These factors include your credit score, which typically should be above 620, or your debt-to-income ratio, which should be less than 43%.

It is also up to the lender to decide the size of the loan that you are eligible for, which they will typically base on your home’s current value and the amount of equity you have in your home. Since the value of your home must first be determined, you must apply to have your home appraised.

Once this has been done, and your lender has collected all the information they need pertaining to your finances, your debt history, and your home, their underwriter takes a few weeks to review your application before you receive a response.

The Main Rules for Getting a Second Mortgage in Canada 

Although the process of applying and getting approved for a second mortgage is relatively straightforward, there are a few cardinal rules pertaining to this particular kind of loan process that are important to be aware of. 

These rules dictate important factors, such as how much money you can get and how you must proceed as you pay the loan off.

1. How much you can borrow

One of the most important rules to understand as you partake in a second mortgage loan process is that there are limitations to how much you can borrow. 

Canadian laws stipulate that lending against real property can only be done to a maximum of 80% of that property’s value. This includes the amount you have borrowed already with your primary mortgage.

Therefore, the allowance for your second mortgage largely depends on the size of your first mortgage. For instance, if your home is valued at $500,000 and you still owe $200,000 on your first mortgage, you could figure out the amount you are allowed to borrow with a second mortgage using the following equations:

• $500,000 (house value) x 80% (mortgage limit) = $400,000 (maximum debt limit)
• $400,000 (maximum debt limit) - $200,000 (existing debt) = $200,000 (second mortgage limit)

Since another Canadian law stipulates that non-amortizing mortgages are limited to a maximum of 65% of the property’s value, if you are going the HELOC route, the HELOC portion of your overall mortgage debt cannot exceed 65% of your home’s value.

2. The terms of repayment

Much like a primary mortgage, when you receive a second mortgage loan, part of the agreement is that you must pay back this loan within an agreed-upon repayment period. Although the length of the period settled on may vary from lender to lender, it is common for the term to be somewhere between 5 and 25 years. 

In addition to complying with this repayment, it is also important that you learn and comply with the terms of the loan, which can also vary depending on who your lender is. For instance, certain lenders stipulate that you must pay a penalty fee if you repay your loan before the end of the term.

3. What happens in the event of a default

If you default on a loan secured against your home, such as a second mortgage, there is an order of priority that exists in terms of how these loans are repaid.

If a foreclosure occurs when you default, the loan that is top priority must be paid in full before any others. Since your primary mortgage was taken out first, it would be a top priority in this situation. After your primary mortgage is paid out in full, the remaining amount can be used to pay off the second mortgage, and so on.

How Canadalend Can Help You Secure a Second Mortgage in Canada

If you need some serious cash and have amassed equity in your home, Canadalend would be happy to help you secure a second mortgage so that you can take advantage of the many benefits of this loan.

By aiding you with such a loan process, we can help you do many things, such as lowering your bill payments, decreasing the amount of interest you pay on your debt, and locking in a fixed rate.

Whether you are interested in consolidating your debt, growing your investments, going back to school, renovating your home, or retiring, taking out a second mortgage can help with all of these things. We can ensure you get a loan that is well-suited to your particular needs.

Fortunately, we do not approach second mortgage approvals using the same method as big banks. Rather than meticulously focusing on all kinds of qualifying factors, such as your citizenship, income level, and credit history, we strictly concentrate on the value of your home and your outstanding loans. 

In doing so, we make the application process as easy as can be, which paves the way for streamlined results and ensures you get the money you need when you need it. 

For more information on the benefits of getting a second mortgage through us or to learn about our loan approval process, call Canadalend at 1-844-586-0713 or contact us here.