Preventing 2nd mortgages
Question
"Can a bank prevent you from adding a 2nd mortgage on your property?"
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Answer
The land titles system (and land registry system in other provinces) is designed so that anyone can add a mortgage charge, lien, or other items on the title of any property.
A mortgage charge usually requires the services of a lawyer, but a lien can be added by a contractor, the government, and others for non-payment of certain types of debts. This does not require the permission of anyone else on title, including any banks or other lenders who may have a mortgage registered.
Banks typically do not like to see 2nd mortgages added to a property because the total Loan-to-Value (LTV) usually will exceed 75%. This increases the risk that the owner (borrower) will default not only on the 2nd mortgage, but also on the 1st mortgage (which the bank owns).
When buying a property, banks may not approve your 1st mortgage financing if a 2nd mortgage will also be added at closing. However, there is nothing stopping you from adding another mortgage onto the property AFTER closing. This can be done just 1 week, 1 month, or 1 year afterwards... anytime works fine.
Although a bank cannot stop you from adding a 2nd (or even 3rd) mortgage on your property, they may have a statement or clause included in your 1st mortgage agreement that the borrower cannot add any extra mortgages to the property, or that the total LTV cannot exceed 75%.
This clause may give the bank the right to immediately demand that the loan be due and payable in full. While this may be within their legal rights if included in the contract, it's doubtful the bank will do so if you have been paying your mortgage payments on time for a long period of time.
To be safe, always check the terms and conditions of your mortgage agreement to ensure that extra financing can be added to the property. If it does not, make sure you are comfortable with the risk that the bank may find out about it and ask for repayment in full. This isn't a big deal and will simply require you refinance with another lender.
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Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002. They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.
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