Refinancing Around a Forgotten Private Second Mortgage

The situation

Parisa and Soo-jin, sisters, had co-owned a semi-detached home in Brampton for close to eight years. Parisa worked as a bookkeeper and Soo-jin as an early childhood educator, and the arrangement had worked well: they split the mortgage, the property taxes, and eventually the cost of a basement renovation that turned the lower level into a rentable suite. The house was worth roughly $520,000 by the time they decided to refinance.

The refinance itself was routine on paper. Their bank had offered a materially lower rate than the one on their existing first mortgage, and rolling the renovation costs into the new loan made more sense than carrying a second high-interest balance separately. Their mortgage broker set a closing date, the new lender issued a mortgage commitment, and the file was sent to our office to handle the legal side of discharging the old mortgage and registering the new one.

What neither sister mentioned at first — because neither thought of it as relevant anymore — was a private loan they had taken out five years earlier from a family friend, Eun-ji, to cover a shortfall when their first mortgage renewal came in lower than expected. Eun-ji had lent them roughly $70,000, secured by a second mortgage registered on the title of the home. The sisters had been paying it down in small instalments ever since and considered it a minor, informal arrangement between friends. It was not informal. It was on title, in writing, with the same legal weight as any other registered mortgage.

What the title search found

A title search is one of the first things our office runs on any refinance, and it is not a formality. In Ontario, a property's title shows every registered interest against it — mortgages, easements, liens, and similar claims — and, critically, the order in which they were registered. That order generally determines priority: whoever registered first gets paid first if the property is ever sold or a debt goes unpaid, ahead of anyone who registered later, regardless of who actually lent the larger amount or who the sisters considered the "main" lender.

The search confirmed Eun-ji's second mortgage was still very much registered, with an outstanding balance of roughly $45,000 after five years of payments. That alone was not a problem. A second mortgage sitting quietly in second position behind a first mortgage is a completely normal, common arrangement.

The problem was what refinancing would do to that order. When a first mortgage is discharged and a brand new first mortgage is registered in its place, the new mortgage does not automatically inherit the old one's priority position. It is a new registration, and on the date it goes onto title, it takes its place based on what is already registered ahead of it. Because Eun-ji's second mortgage had been sitting on title since before the refinance, discharging the old first mortgage and registering the new one without addressing that second mortgage would have left the new lender's roughly $400,000 loan ranking behind a $45,000 private mortgage the new lender had never agreed to be subordinate to. No institutional lender will fund a mortgage on those terms, and the new lender's own solicitor would have caught it before advancing funds regardless — but by then, the closing date would have been at serious risk.

What we did

1. Confirmed the priority gap before it reached the new lender's solicitor. Running our own title search early, rather than waiting for the new lender's team to flag it, gave the sisters weeks of runway instead of days. A priority problem discovered a week before closing is a scramble; discovered a month before closing, it is routine paperwork.
2. Explained the fix to Parisa and Soo-jin in plain terms. The sisters did not need to pay off Eun-ji's loan to solve this. What was needed was a postponement agreement — a document in which Eun-ji, as the existing second mortgage holder, formally agrees that the new refinance mortgage will rank ahead of her mortgage, even though her mortgage was registered first in time. Postponements are a standard tool for exactly this situation and do not change the amount anyone owes; they only reorder priority on title.
3. Contacted Eun-ji directly to arrange the postponement. Because Eun-ji was a private individual rather than an institutional lender, there was no in-house legal department to process the request automatically. We explained what the postponement would and would not do — her $45,000 balance and her right to be repaid stayed exactly the same; only her ranking against a future sale or default changed, moving from first-in-line among the mortgages to second. She had no objection once it was explained, and signed once we prepared the postponement agreement.
4. Registered the postponement in the correct sequence with the new mortgage. Timing mattered: the postponement had to be registered on title alongside the discharge of the old first mortgage and the registration of the new one, in an order that left no gap where the priority problem could resurface. We coordinated this directly with the new lender's solicitor so all three registrations were prepared to go through together on closing day.
5. Verified the final title before releasing funds. After registration, we pulled title once more to confirm the new first mortgage sat in first position, Eun-ji's mortgage sat properly in second position, and nothing else had attached to the property in the interim — a routine but essential last check before any refinance proceeds are released to the borrowers.

The outcome

The refinance closed on the original date the sisters' broker had set. Their new first mortgage of roughly $400,000 paid off the old first mortgage balance of about $300,000, leaving roughly $100,000 in equity drawn out, most of which went toward finishing a second renovation project and paying closing costs of a few thousand dollars. Eun-ji's private mortgage stayed in place, properly postponed to second position, with its own $45,000 balance untouched and still being paid down on the original schedule.

Nothing about the sisters' relationship with Eun-ji had to change, and nothing about their repayment arrangement with her needed to be renegotiated under pressure. The only real work was making sure the paperwork on title matched what everyone had actually agreed to five years apart from each other — the bank's new loan and Eun-ji's old one, reconciled into the correct order.

The case is a reminder of something people underestimate about private loans between family or friends: registering them on title makes them legally real in every sense, including all the consequences that come with priority, discharge, and postponement, whether or not the parties think of the loan as informal.

It is also a reminder that co-ownership between siblings, or any two people sharing title, adds a layer worth double-checking before any refinance. Parisa and Soo-jin each remembered slightly different details about the original loan from Eun-ji — one recalled the balance as closer to $50,000, the other closer to $40,000 — and it was only the title search and Eun-ji's own records that settled the actual figure. Co-owners rarely track a shared debt with the same precision a single owner would, simply because each assumes the other is keeping the file.

What you can learn from this