Second Mortgage in Ontario: How It Works and the Risks

You have built up equity in your home and need cash for renovations, debts or another purpose. Your first mortgage is staying in place, so a second mortgage looks like a way to get at that equity without replacing the first loan.

A second mortgage can work, but it puts your home on the line twice. This article explains how it ranks behind the first mortgage, what a lender can do if payments are missed, and the risks worth weighing before you sign.

What a second mortgage is

A second mortgage is a second loan secured on your home. You must keep paying the first mortgage as well, and second-mortgage interest rates are usually higher because they are riskier for lenders.

When you borrow against home equity, you can usually borrow up to 80% of your home's value, minus what you still owe. The home is the security, so if you cannot repay, you may lose it through foreclosure.

In plain terms, you are carrying two debts against one property, with two sets of payments and two lenders who each have rights against the home.

How a second mortgage ranks behind the first

Ranking, or priority, decides who gets paid first if the home is sold to satisfy the debts. For land under the Land Titles Act, registered instruments affecting the same interest in the same parcel rank in the order they are entered in the register, so a second charge ranks behind an earlier registered first charge.

That order can be changed. A charge's priority can be altered by registering a postponement under subsection 78(6) of the Land Titles Act.

Other claims can also affect the picture. If you own a condominium unit and fall behind on common expenses, a registered condo lien has priority over every registered and unregistered encumbrance on the unit, including an earlier mortgage, though it does not have priority over a Crown claim other than a claim by way of mortgage. The lien loses that priority over a mortgage if the corporation does not register it within three months or does not give written notice to every registered encumbrancer on or before the day it registers. Older condominiums under the repealed Condominium Act had different priority rules, so a lawyer can confirm how your unit is treated.

What the lender can do if you default

Your second mortgage contract sets out what counts as default and what follows. Where a mortgage contains a power of sale, the lender cannot give notice of exercising it until the default has continued for at least 15 days, and cannot sell until at least 35 days after the notice is given.

The notice of sale must go to every person having an interest in the property and must be in Form 1, Notice of Sale under Mortgage, prescribed under the Mortgages Act. Once a notice of sale has been given, the lender cannot start any further proceeding to enforce the mortgage until the time in the notice has passed, unless a Superior Court judge permits it.

If the mortgage has no power of sale clause, the statutory power of sale applies only after three months' default and requires 45 days' notice to persons with an interest in the property.

• A lender selling under power of sale must take reasonable precautions to obtain the true market value of the property as of the date of sale.
• A spouse with no ownership interest in the matrimonial home but with a right of possession has the same right of redemption or relief against forfeiture as the owner-spouse, and is entitled to the same notice.
• If a sale does not cover what is owed, whether the lender can claim a shortfall depends on your mortgage and on whether the sale achieved true market value, so it is worth confirming with a lawyer. A claim on the covenant to repay must be started within the later of 10 years after the cause of action arose and 10 years after the liable person's interest in the land was conveyed or transferred.

Your rights while in default

A borrower in default can stop the lender from enforcing an acceleration clause by paying the amount due under the mortgage, meaning the arrears and not money that is only due later, plus the lender's necessary expenses. This applies despite any agreement to the contrary.

You can also give the lender written notice requiring a written statement of the arrears and expenses. The lender must answer within 15 days, and if it fails to do so without reasonable excuse, or gives an incomplete or incorrect answer, its enforcement rights are suspended until it complies. Once a power of sale has closed, these protections no longer apply and you are limited to a claim for damages against the lender, so acting early matters.

The main risks and costs to weigh

• Your home secures both loans, and default on either can put it at risk.
• Higher interest rates than a first mortgage are usual.
• No fine, penalty or rate of interest on arrears may increase the charge on the arrears beyond the rate payable on principal not in arrears. Check your contract for charges that look like they do this.
• Charging interest at an annual percentage rate above 35 per cent is a criminal offence. Certain commercial loans to borrowers who are not natural persons are exempt under regulations in force January 1, 2025.
• Total debt rises, which can limit your options later if you want to sell, refinance or move.

What to do next

• Get your first mortgage statement and check its terms for restrictions on further borrowing.
• Ask each lender for the full cost in writing: rate, fees, term and what happens at renewal.
• Ask who will hold the first and second charges and whether any postponement is involved.
• Have a lawyer review the commitment before you sign.
• Plan how you will repay the loan or replace it when the term ends.

If you have already missed payments, speak with a lawyer promptly. The timelines for enforcement are set by statute and by your contract, and the facts of your case decide what options remain.

Frequently asked questions