Born in Paris, son of Henry Spencer, 1st Earl of Sunderland, Spencer inherited his father's peerage dignities at the age of three, becoming Baron Spencer of Wormleighton and Earl of Sunderland. He joined the British Army, reaching the rank of captain in Prince Rupert's Regiment of Horse. He married Anne Digby (d. 1715), daughter of the Lord Bristol on 10 June 1665, then proceeded to serve successively as ambassador to Madrid (1671–1672), Paris (1672–1673), and the United Provinces (1673). He served as a Gentleman of the Bedchamber from 1673 to 1679, then was invested a Privy Councillor and appointed Secretary of State for the Northern Department in 1679; at the same time, he served as Ambassador Extraordinary to Paris.
Lord Sunderland also served as Lord Lieutenant of Staffordshire during the minority of Lord Shrewsbury until 1681. That year, he was dismissed by Charles II, due to his opposition of the Duke of York's succession, but presently regained the king's confidence (through his mistress, the Duchess of Portsmouth). Intermittently, between 1682 and 1688, he served as Secretary of State for the Southern Department, Lord Lieutenant of Warwickshire, and Lord President of the Council; in 1687, he signed the King's grant of religious freedom for the Brenttown (Brenton) tract in Old Prince William County, Virginia, to encourage settlement of French Protestants. The same year he openly embraced the Roman Catholic faith to please the king. That year, he was also made a Knight of the Garter. However, it was clear that he was growing uncomfortable under the recently enthroned Duke of York (James II), and was summarily dismissed in October 1688, with the remark, "You have your pardon; much good doe it you. I hope you will be more faithful to your next master than you have been to me."
Sunderland fled to Utrecht, the Netherlands, and wrote to Sir John Churchill, a prominent English statesman, asking him to "make things easy for a man in my condition." At first, King William III excepted Lord Sunderland from the 1690 Act of Indemnity, but by 1691, he was allowed to return to the country. He began sitting in the House of Lords, and soon enough, King William paid a visit to his home in Althorp, Northamptonshire, to discuss public affairs. Lord Sunderland advised him to select all of his ministers from one political system, and eventually effected a reconciliation between King William and his sister-in-law, later Queen Anne. He was an influential adviser, causing William to accept only Whigs in his government.
Sunderland became Lord Chamberlain of the Household in April 1697, and was a Lord Justice for a short period, but "the general suspicion with which he was regarded terrified him", and he eventually retired from public life in December of that year. Sunderland died in 1702 at Althorp, where he led a secluded life, and his only surviving son was Charles Spencer, 3rd Earl of Sunderland.
At least two other children are considered to have died young.