Can You Get a Second Mortgage With Bad Credit in Ontario?

If your credit is poor but you have equity in your home, a second mortgage may look like a way to raise money. Lenders who focus on equity sometimes consider borrowers that banks turn away.

This article explains how a second mortgage works, what affects what you can borrow, what it costs, and the risks you should weigh before signing.

How a second mortgage works

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

The risk comes from ranking. Registered instruments rank in the order they are entered in the register, so a second charge ranks behind an earlier registered first charge. A charge's priority can be changed by registering a postponement. In plain terms, if the home is sold to pay debts, the first lender is generally paid before the second.

Equity matters more than credit score

When you borrow against home equity, you can usually borrow up to 80% of your home's value, minus what you still owe. So the amount available depends on your home's value and your first mortgage balance. A lender focused on equity may look at that cushion more than at your credit history.

Whether a particular lender will approve you, and on what terms, depends on that lender. No rule guarantees approval, and bad credit usually means a higher price for the loan.

Costs and risks to weigh

• Higher interest rates than a first mortgage.
• If the loan is a private mortgage, the fees are often higher than for a traditional mortgage, and the lender may charge fees for late payments, lapsed insurance or property upkeep.
• If the loan is a private mortgage, the terms are generally short, often one or two years, and often interest-only, so you should have an exit strategy for how you will repay or refinance.
• The home is the security, and if you cannot repay you may lose it through foreclosure.

Interest on arrears also has limits. No fine, penalty or rate of interest may be charged on mortgage arrears that increases the charge on the arrears beyond the rate payable on principal not in arrears. It is a criminal offence to enter into or receive interest at a criminal rate, which is an annual percentage rate above 35 per cent on the credit advanced.

If you fall behind, 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.

Working with a broker and checking the lender

Mortgage brokerages, brokers, agents and administrators in Ontario are licensed by FSRA under the Mortgage Brokerages, Lenders and Administrators Act, 2006. You can check a licence on FSRA's public listing, which FSRA says is more reliable than a printed licence, and you may not be protected if you deal with unlicensed people.

A brokerage must take reasonable steps to make sure any mortgage it presents is suitable for your needs and circumstances. It must disclose material risks in writing, disclose its relationship with each lender, and disclose any actual or potential conflict of interest, and it must get your written acknowledgement. These disclosures must be made at the earliest opportunity and no later than two business days before you sign the mortgage agreement or instrument, whichever comes first.

What to do next

• Find out your home's value and your first mortgage balance to see how much equity you have.
• Check the broker's licence on FSRA's public listing.
• Ask for all fees, the term, the rate and the payment type in writing.
• Have an exit strategy, such as how you will repay or refinance at the end of the term.

If the lender's terms look unusual, or you are already behind on payments, speak to a lawyer early. Your options are usually better before default than after.

Frequently asked questions