Getting a Second Mortgage | TD Canada Trust (2024)

FAQs

How does a 2nd mortgage work in Canada? ›

A second mortgage is a second loan that you take on your home. It has the same features as a mortgage. While you pay off your second mortgage, you also need to continue to pay off your first mortgage. Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders.

This option isn't available to everyone though; it depends on your personal and financial situation. However, keep in mind that the minimum down payment for a second home in Canada is 5% for an insured mortgage, and 20% for a conventional loan.

A Second Trust Deed Loan is a type of loan that allows borrowers to use their property as collateral for additional financing. This type of loan is also known as a junior loan or subordinated loan because it is taken out against a property that already has an existing loan or lien, called the first deed of trust.

Qualifying for a second mortgage with bad credit is challenging, especially since lenders set a high bar for these inherently riskier loans to begin with: Many expect your FICO score to be at a minimum “good” (670) or high “fair” (640-669). Still, qualifying is possible, especially if you have a sizable equity stake.

Higher Interest Rates

Second mortgages usually have higher interest rates than first mortgages. This is because lenders see them as riskier. The higher the risk, the higher the rate. These increased rates mean higher monthly payments for borrowers.

Capital gains tax on second property in Canada

The good news is that only half of the capital gain is subject to taxation. Property Taxes: You will be responsible for paying property taxes on your second home, just like you would on your primary residence.

You can choose from several viable options to buy a second home with no money down. One option is to apply for a government-backed mortgage and turn the second home into your primary residence. Other options include assuming a mortgage, tapping into your home equity or using the proceeds from a reverse mortgage.

A Canadian taxpayer may only designate one home as their principal private residence for a particular year. According to Canadian tax rules, a home can be designated as a principal private residence for each year in which a taxpayer, their spouse, common-law partner, or their children were residents in Canada.

This process is fairly common in estate planning and can be beneficial for various reasons such as avoiding probate and maintaining control over the property. The bank may require notice of the property transfer.

What is the 2 rule for mortgages? ›

The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.

Types of Second Mortgages. There are two types of second mortgages: home equity loans and home equity lines of credit (HELOCs).

Qualifying for a Second Mortgage

They will look at your income, creditworthiness and overall debts. Typically, lenders look for a minimum credit score at or above 620 – which is generally considered “fair” credit, according to credit scoring company FICO.

Frequently, it is tougher to get a second mortgage than a primary mortgage. While HELOC rejection rates are the lowest in four years, about half of applications are still denied, for example.

To qualify for a second mortgage, the requirements vary depending on the lender. However, many lenders prefer that you have 20% equity in your home. You can typically borrow up to 85% of your home's value, minus your current mortgage debts.

On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage.

Borrower requirements for second home mortgages

Borrowers may be approved with: A credit score of 680 or higher (typical) A credit score of 640-679 (with a down payment of 25% or more) A debt-to-income ratio (DTI) of up to 45%

How much do I need for a down payment on a second home? The down payment for a first home can be as low as 0% and as high as 20% for a conventional loan. But the required down payment for a second home is around 10%, and sometimes more than 20%.