Second Mortgages – How do they work?

April 1, 2013

Bank - Second MortgagesMany Canadians use a second mortgage to help achieve their financial goals; especially with the low mortgage rates that we’re seeing in today’s marketplace. Learn about second mortgages, their benefits and how to qualify.

What is a second mortgage?

A second mortgage is a home equity loan that allows homeowners to borrow money from the equity in their home, without refinancing their current mortgage. Equity is the difference between the appraised value of the home and the amount owed on the first mortgage. The loan amount available is based on the equity in the home.

Benefits of a second mortgage

  • The ability to consolidate debt that has high interest into one low interest rate monthly payment.
  • Can be used towards home improvements and major purchases.
  • Great way to finance a small business in a cost-effective manner.
  • Help pay for college or university for your child.

How to qualify for a second mortgage

You must have over 20% of equity in your home and be able to pay the monthly payments on your second mortgage without exceeding your Total Debt Service Ratio (TDS). Those with low credit scores may still be eligible for a second mortgage albeit at a higher interest rate than those with better scores.
Lenders also look at the length of time that you’ve been working with one employer. This provides a sense of security to the lender and makes it easier to qualify for a second mortgage. You typically have to be off your probationary period of six months and show previous employment history of six months or greater.

You must bring your mortgage papers and social insurance number, proof of employment and bank statements when applying for a second mortgage. Ask your lender in advance to ensure you have the appropriate documentation.

Additional costs of a second mortgage

Be prepared that you will need to pay closing costs with a second mortgage as well. They typically run from 2 to 5% of the value of your second mortgage. These costs may include:

  • Home appraisal fee
  • Legal fees
  • Title search
  • Title insurance

  • Comments(5)

    Very interested in the option…
    How do we start the process?


    Jeff kuchma says:

    I bought a house in Brampton 1 1/2 year ago and I am thinking to get a second mortgage to consolidates all my credits. I need $55,000.00 and I would like to get some information about that, such as, how much the interest will be, how much are the fees including the appraise. I would be very grateful for your response.

    Gilma Restrepo says:

    We have lived in our home for 3 years now. We are looking to get a second mortgage of about $75,000 to help consolidate some debt. What is the interest rate on that amount. What time frame is it paid back by? Are there any fees and if so how much for signing a second mortgage. I appreciate your time and hope to hear back soon.

    Nicole Leyland says:

    Our house is paid for. We are looking for a second mortgage in order to buy a business that includes a house. We want to rent our current house out and move into the house on the business property.

    Dennis Beaulieu says:

    I am looking at getting a second mortgage approx $35000 we bought our house 3 years ago and put a down payment of over $100000. How do I go about the loan and who has to apply can it be only one of the people on the first motgage?

    Christine Scharien says: