Second mortgages in Canada: What are the rules?

Whatever the reason for having a second property, there are in fact many multiple-property owners in Canada. In British Columbia and Nova Scotia, for instance, owners with multiple properties represent 15% and 22% of all home owners, respectively, according to Statistics Canada. That’s more than one in 10 home owners in British Columbia, and almost one in five in Nova Scotia.

If you’re hoping to be among the growing number of Canadians who own a second property, or if you want to add a third or fourth, it’s essential that you become familiar with the mortgage rules.

What is a second mortgage?

Generally a second mortgage (sometimes called a home equity loan) is when a home owner gets additional financing on top of their pre-existing mortgage for the same property. In Canada, you can typically access up to 80% of your home’s appraised value for a second mortgage, minus the balance remaining on your first mortgage.

A second mortgage can also be when you get an additional mortgage on a totally different property, such as a cottage. In this case, you’d have two mortgages, one for each of the properties. This is the type of second mortgage that this article addresses.

How to get a mortgage on a second property

If you already own a home, here’s some good news: First and second property mortgages have much in common. So, you know some steps, but it’s always good to have a reminder. Whether you’re applying for a mortgage on your first or second home, you will have to:

• Qualify for the mortgage under the Canadian mortgage stress test.
• Have debt service ratios that meet your lender’s requirements: Depending on the lender, you may be limited to a maximum gross debt service (GDS) ratio of 39% and a maximum total debt service (TDS) ratio of 44%.
• Have a strong credit history: It’s possible to qualify for a mortgage with a credit score of 600 or less. However, a score of 680 or more is generally needed to get the best mortgage rates from a prime lender, like a major bank. 

Qualifying criteria can vary between types of lenders, so always ask your lender or mortgage broker about the criteria you must meet. 

So, there are many similarities between buying your first property and buying your next. But now on to what’s different.

Mortgage rules for second properties: What’s different

Everyone who buys a home in Canada must meet certain down payment requirements. The main difference when getting a mortgage for a second property is that the down payment requirements can vary, based on two factors: 

• How you intend to use the property—i.e., for personal use (such as a second home or cottage) or as a rental or investment property. 

• Whether or not the property will be owner-occupied—i.e., whether you will be living in the property (alone or with a tenant) or renting out all the units in the building. 

If the second property is for personal use, such as a vacation property or cottage, you will likely have to meet the same down payment requirements as with your first home. For example, a second home purchased for $800,000 requires a down payment of 5% on the first $500,000, plus 10% on the portion above $500,000. 

Rentals that are owner-occupied—maybe a home in which the owner lives on the main floor, and a tenant lives in the basement suite—generally are subject to the same rules, says Elan Weintraub, co-founder and mortgage broker with mortgageoutlet.ca. 

However, if the property will not be occupied by the owner, meaning the entire property will be rented out, Weintraub says you should have a down payment of at least 20%, no matter the price of the home. He adds that certain lenders have different requirements.

Lenders take the question of owner occupancy seriously, so always be honest about your plans, advises Weintraub. “If you say you will live in the property, then that’s the expectation, and depending on your lender and the mortgage type, you could be in default if you do not live there.” 

Should you get a mortgage on a second property?

Managing two mortgages is a big financial commitment, so it’s important to plan ahead and consider seeking expert advice if you’re unsure if you can afford it. 

Weintraub says there are several key factors to consider before deciding to take on a second property mortgage. These include:

• Your financial situation: Do you have extra savings in case, say, the roof collapses, the tenant stops paying rent, and so on? Buying a second property could be risky if you’re using your entire savings to make the purchase, leaving no room for unexpected expenses.

• The time commitment: A second property (especially a cottage and/or rental property) could require a lot of maintenance and attention. Do you have the time to care for the property yourself, or extra money to pay for those services? If not, owning additional real estate may not be something you have time for. 
• Your income stability: How secure is your job or your business? Are you certain you will have the income needed in the future to continue making payments on two mortgages? If you’re unsure about your ability to make payments in the future, you may not have the financial means of owning multiple properties.
• Your time horizon: If you’re planning to sell the property in a few years, you may not recoup the costs of your initial investment. There are many upfront costs to account for when buying and selling real estate, including land transfer taxes, realtor fees and legal fees. 

Second mortgage rates in Canada: What to expect

Whether you go with the same lender or a different one for your second mortgage, the interest rate will likely be higher than for your first mortgage. That’s because your second mortgage takes second priority: If you foreclose on the home, the debt owed to your first lender must be repaid first. Therefore, your second mortgage provider takes on a greater risk and is compensated for this risk by charging you a higher mortgage rate.  

Keep in mind that you’ll also have to pay the same administrative costs as with your first mortgage, including things like appraisal and legal fees. Furthermore, Weintraub emphasizes that cash flow should be another consideration. “You would need a strong income to acquire a second property, as you would have significant debt—a mortgage on your primary and secondary residence. A few years ago, rates were 1% to 3%, so it was much easier to borrow money. Today, the mortgage stress test essentially requires the mortgage to be tested at 8% or higher.”

Is a second mortgage worth it?

Getting a mortgage on a second property can help you purchase the perfect cottage hideaway, support your adult children’s housing needs, or become a landlord for the first time. However, second property mortgages aren’t for everyone. Before committing to a second property, understand your financial position and consider speaking to a financial advisor or mortgage broker. 

Read more about buying a second home:

• How to use equity to buy a second home
• It’s possible to be a first-time home buyer twice—here’s how
• Will you make money on your rental property?
• What expenses can you deduct for a second property in Canada?

About Sandra MacGregor

Sandra MacGregor has been writing about personal finance, mortgages, investing and credit cards for over a decade.

Linkedin Twitter