On this page
These two routes answer the same question in opposite ways. A second mortgage says you will repay everything, with the home as security. A consumer proposal says you cannot repay everything, and asks creditors to accept a plan.
The side-by-side
| Second mortgage | Consumer proposal | |
|---|---|---|
| What it does to debt | Pays unsecured debts in full and replaces them with a loan | Offers creditors part of what you owe, more time, or both |
| Limit | Up to 80% of appraised value, minus the mortgage balance | Total debts of $250,000 or less, not counting a main home mortgage |
| Payments | Interest, often interest only, plus the first mortgage | One payment to a trustee for up to five years |
| Cost | Higher interest rate and fees, and the debt is still owed in full | Trustee costs, with a total set by what creditors accept |
| Credit effect | Debts are paid, new loan is recorded | Record stays for the term plus three years, and is public |
| Risk to the home | The home is security for the new loan | You keep assets if you keep paying your secured creditors |
Limits and terms for the proposal come from the Office of the Superintendent of Bankruptcy. Limits for the second mortgage come from the Financial Consumer Agency of Canada.
Why they differ
A second mortgage is borrowing. It does not reduce what you owe. It changes who you owe and moves the debt behind your home. The agency notes that rates are usually higher than on a first mortgage and that you must keep paying the first mortgage as well.
A proposal is a legal process. A Licensed Insolvency Trustee prepares it, files it with the Office of the Superintendent of Bankruptcy and submits it to creditors, and you pay the trustee, who distributes the money. Creditors have 45 days to accept or reject. Once it is filed, you stop paying unsecured creditors, and wage garnishments and lawsuits are halted. If you miss three monthly payments, the proposal is deemed annulled and creditors can pursue collection.
What each costs
The worked example sets a $50,000 loan against an assumed $18,000 proposal over five years. The loan costs $33,250 in interest and fees over the period, and the $50,000 is still owed at the end. The proposal in that example costs a total of $18,000, a gap of $15,250. The proposal figure is an assumption, since what creditors accept differs for every file. The office does not state fees for proposals on its page, so ask the trustee for the total in dollars.
The costs that never show up as dollars matter as well. A proposal leaves a record, assigns a low credit score, and affects borrowing for the term plus three years. A loan keeps your credit record cleaner for now, but a missed payment has consequences for the home.
What each risks
The second mortgage risks the home. The agency warns that if you cannot repay, you may face serious consequences, including foreclosure of your home. Unsecured debts like credit cards cannot be enforced against the house in the same way. By moving them onto the home, you give them that power.
The proposal risks the record and the commitment. A public record and a low score make borrowing harder for years, and an annulled proposal returns creditors to collection. It also needs a trustee, a budget you can hold for up to five years, and counselling sessions, which the office says are required.
Which situation suits which
A second mortgage tends to suit someone whose income comfortably covers the new payment, whose debt is manageable relative to the equity, and who wants to protect their credit record. It suits a single, temporary spike more than a long slide.
A proposal tends to suit someone whose debts are larger than they can repay in a reasonable time, even at lower interest, and whose income is stable enough to hold a plan. It also suits someone who wants garnishments and lawsuits stopped.
Many people sit between the two, so a free first meeting with a Licensed Insolvency Trustee is the fair way to compare. The office says trustees usually do not charge for it. A non-profit credit counsellor is another early step, and the Financial Consumer Agency of Canada says talking to one will not affect your credit score.
Read how a consolidation second mortgage works and run the calculator with real quotes. If you are already behind on the mortgage, start with the mortgage arrears page.
What happens to the home in each case
With a second mortgage, the home is tied to the new loan from the first day. If you pay as agreed, nothing changes. If you do not, the lender can use the rights in the loan against the home, under the rules of your province. You also still owe the first mortgage, so two lenders have a claim.
With a proposal, the mortgage continues as before. The Office of the Superintendent of Bankruptcy says you keep your assets if you keep paying your secured creditors. The proposal deals with unsecured debts, and a missed mortgage payment is handled by the mortgage lender, not by the proposal. If you are behind on the mortgage already, say so at the first meeting with the trustee, because it changes the advice.
Neither route is a reason to avoid telling the people who need to know. Your mortgage lender, your trustee and your family should all hear about the plan before it is signed, not after.
Questions to ask before you choose
Ask a trustee what they expect creditors to accept on your numbers, what the total will be, and how your mortgage is treated. Ask a mortgage professional for the total cost in dollars of the loan and the date it comes due. Ask yourself what happens in both cases if your income drops.
To talk to a licensed mortgage professional after you have spoken to a trustee, you can check your options. It is a request, and you can say no.
$45,000 of unsecured debt: a $50,000 second mortgage against an assumed proposal offer
Made-up figures, not typical results. The second mortgage is $50,000, interest only at an assumed 12%, with an assumed 2% lender fee, 1.5% broker fee and $1,500 for legal, appraisal and title, held for five years. The proposal assumes creditors accept $18,000 repaid over five years, trustee fees included. The Office of the Superintendent of Bankruptcy does not publish typical settlement amounts, and what creditors accept depends on each case.
- Second mortgage: fees at the start
- $3,250
- Second mortgage: interest over five years
- $30,000
- Second mortgage: cost over five years, not counting the $50,000
- $33,250
- Proposal: assumed total paid
- $18,000
- Second mortgage: still owed after five years
- $50,000
- Gap in what is paid over five years, before the $50,000
- $15,250
$1,000 lender, $750 broker, $1,500 legal and other
$50,000 at 12% x 5
$300 a month for 60 months
Questions people ask
Who can file a consumer proposal?
The Office of the Superintendent of Bankruptcy says it is for people whose total debts are $250,000 or less, not counting a mortgage on their main home. Only a Licensed Insolvency Trustee can file it. Larger debts may qualify for a Division I proposal.
Do creditors have to accept my proposal?
Creditors have 45 days to accept or reject it, according to the Office of the Superintendent of Bankruptcy. Your trustee designs it with that vote in mind. Ask the trustee how likely acceptance is on your numbers before you decide.
Will a consumer proposal put my home at risk?
The Office of the Superintendent of Bankruptcy says you keep your assets in a proposal if you keep paying your secured creditors, such as a mortgage lender. It does not take new security against the home, unlike a second mortgage. Missed mortgage payments remain a separate problem.
What does a consumer proposal do to my credit?
The office says credit bureaus are notified when it is filed and that it stays on your credit record for the proposal term plus three years. It also says the record is public. A second mortgage used to pay debts does not leave that kind of record.
Is credit counselling a third option?
Yes. The Financial Consumer Agency of Canada says a debt management plan usually requires repaying 100% of the debts, often with reduced interest, and usually covers unsecured debts only. It is informal, and creditors may refuse it.
Sources
- Office of the Superintendent of Bankruptcy Canada: Consumer proposals
- Office of the Superintendent of Bankruptcy Canada: Consumed by debt? Information for consumers on the insolvency process
- Financial Consumer Agency of Canada: Borrowing against your home equity
- Financial Consumer Agency of Canada: Getting help from a credit counsellor