Who this is for: Landlords with equity in a rental home or unit, a clear use for the money, and rent that covers the new payment with room to spare.
On this page
Landlords often hold their equity in a building they cannot touch with a bank loan. Interest rates rise, rents lag, and the lender’s stress tests do not match the real numbers. A second mortgage on a rental property is one way some owners get at that equity. It also adds a payment to a property where margins are already thin, so the math needs to be tested harder than usual.
What a rental property second mortgage is
It is a loan registered on the title of the rental, behind the first mortgage. You keep paying the first mortgage, and you add a payment for the second. The Financial Consumer Agency of Canada says second mortgages usually have higher rates than first mortgages because lenders take more risk, and the rental adds risk of its own: vacancies, repairs and tenants.
The money can go anywhere the lender allows. Common uses are repairs, an upgrade that raises the rent, paying off a high-interest debt, or putting a down payment on another property. This page covers loans secured on the rental itself. If you plan to borrow against your own home to buy a rental, read the page on equity as a down payment as well.
When it makes sense
It makes sense when the money is aimed at the property, and there is a clear route to higher income or lower cost. A repair that keeps a unit rentable, a legal conversion that adds a suite, or a roof that stops an insurance claim from being refused are examples. The question to ask is whether the spending protects or raises the rent.
It also makes sense when the building has enough equity and cash flow that a bad month would not break it. Build a worst-case month: one unit empty, one major repair, and the interest rate on any variable loans higher. If you can still pay the first and second mortgages, the loan is carrying less risk than it looks.
Owners who need a short bridge, such as paying for work before a refinance at a better rate, can use a short-term second mortgage with an exit that is already agreed in principle.
When it makes things worse
It makes things worse when the rent already barely pays the first mortgage, taxes and insurance. A second mortgage adds interest with nothing to cover it, and you end up funding the property from your wages.
It also goes wrong when the borrowed money buys a promise instead of a result. An upgrade that you hope will raise the rent, or a market you hope will rise, is not a plan. The first worked example above shows an $80,000 upgrade where the extra rent does not even cover the interest.
Tenants add a risk of their own. A long vacancy, a tenant who stops paying, or a long dispute at a tribunal can hurt your cash flow for months while the loan payments continue.
What it really costs
Read the worked examples above. They show two things: the loan’s interest against the rent it might produce, and the way tax follows the use of the money. Fees come on top. The agency lists appraisal, title search, title insurance and legal costs as costs to expect. Add a lender fee and a broker fee if there is one, and ask for each in dollars.
On tax, the Canada Revenue Agency says you can deduct interest on money you borrow to buy or improve a rental property, but not on money borrowed for personal use. Certain financing costs, such as appraisal and legal fees for a loan, are generally deducted over five years rather than all at once. A lump-sum interest payment is not fully deductible in the year paid. These rules turn on details, so work with an accountant before you decide whether the loan works for you.
The calculator shows the payment and the total from a quote. Compare that with the rent you actually collect, net of vacancies, and not the rent on a listing.
The risk to your property
The building is the security. If you cannot repay, the lender can enforce the loan, which may lead to a sale of the property. The agency warns that missing payments on a home equity loan can lead to serious consequences, including foreclosure.
Stacking is the other danger. A rental with a first mortgage, a second mortgage and a line of credit can look healthy until one unit is empty. Make a list of what is owed, in order, and what each lender could do if you were late.
If other properties are pledged as security, a problem on the rental can reach them. Ask whether the loan is secured only on this property, and get the answer in writing.
Options to try first
Start with a conversation with your bank about a refinance of the rental or a secured line of credit. A refinance may give you a larger amount at a lower rate, but it may reset your first mortgage terms or carry a prepayment cost. A HELOC on your own home, if you have one and a bank will provide it, may cost less than a private loan on the rental.
Other options include selling a weaker property to reduce debt, delaying an upgrade until the cash flow supports it, or spreading the work over a few years from savings. Compare each one on total cost and on what happens if rent falls.
For a larger picture of how equity loans compare, see the HELOC and second mortgage comparison.
How the exit works
Most private second mortgages are short, and the balance is due at the end. Write down where the money comes from: a refinance with a bank, the sale of the rental, or a payoff from another source. If the plan is a refinance, the lender will look at the building’s rent, your income and the appraisal at that time. Test the plan with rent lower and the appraisal lower than you expect.
Ask what the lender charges to extend, and what happens if you are late. Get both answers before you sign.
What to ask before you sign
- The total cost of borrowing in dollars for the whole term, with every fee shown.
- What you will still owe on the last day.
- Whether the loan is secured only on this property.
- How the lender treats rent in its decision.
- What it costs to extend, and what a late payment triggers.
- The name of the licensed professional and how to check their licence with your provincial regulator.
Keep a separate account for the borrowed money and keep every receipt, because your accountant will need them. If you want to talk it through with a licensed mortgage professional in your province, you can check your options. You are free to say no.
An $80,000 unit upgrade that adds $600 a month in rent
Made-up figures only. An assumed 12% interest-only rate for one year and an assumed $600 monthly rent increase after the work, with a full year of the higher rent. Fees are left out of this line to keep the sums simple.
- Amount borrowed for the work
- $80,000
- Extra rent for a year
- $7,200
- Second mortgage interest for a year
- $9,600
- Result before fees
- -$2,400
interest-only, so still owed after the year
$600 x 12 months
$80,000 at 12%
A $100,000 loan used for two purposes
Made-up figures. An assumed 10% interest rate for one year on $100,000, with $70,000 spent on repairs to the rental and $30,000 spent on a personal vacation and furniture. This is an illustration of how use matters, not tax advice.
- Total interest for the year
- $10,000
- Interest linked to rental spending
- $7,000
- Interest linked to personal spending
- $3,000
- Interest that might be claimable
- $7,000
$100,000 at 10%
70% of $10,000
30% of $10,000
Questions people ask
Is the interest on a rental property second mortgage tax deductible?
The Canada Revenue Agency says you can deduct interest on money you borrow to buy or improve a rental property. Interest on money borrowed for personal use is not deductible. What counts is how you use the money, so keep records and ask an accountant.
What if I borrow against my rental and spend the money on my own home?
The interest on that part is personal and is not deducted against rental income. The Canada Revenue Agency's guide says refinancing a rental to fund a personal purchase does not make the extra interest deductible. Splitting the loan or using a separate loan keeps the records clean.
Do lenders count rent when they decide?
Many do, but they use their own formulas, and some count only part of the rent or look at your overall income and credit as well. Ask the licensed professional which figures the lender will use, and bring your leases, tenant details and a record of rent received.
Can I use equity from my own home to buy a rental instead?
Yes, people do, but it puts the family home behind an investment. If the rental sits empty or loses value you still owe the loan against your house. The separate page on using equity for a down payment looks at that choice closely.
What happens to my tenants if I fall behind on the loan?
A lender with a mortgage on the property can enforce it, which may lead to a sale. Tenants have rights under provincial rules, and a sale does not always end a lease. Speak to a lawyer if a notice arrives, and do not stop paying the first mortgage.
Is a second mortgage on a rental harder to get than on my home?
It can be, because lenders often treat a rental as a higher risk than an owner-occupied home. Rates, fees and the amount you can borrow may differ. Ask for the terms in writing and compare them with what a bank offers for the same property.