Second Mortgage vs. Refinance: Clear Answers to Cut Confusion & Costs

Key point:

A second mortgage allows you to borrow against your home equity with an additional loan on top of your existing mortgage, while a refinance replaces your current mortgage with a new one (often at a new rate or different terms). The best choice depends on your financial goals, the equity in your home, and current interest rates in Canada. Below, we explain each option, their pros and cons, and how to decide which is right for you in Toronto or anywhere in Ontario.

What is a Second Mortgage?

Answer: A second mortgage is an additional home loan that you take out using your home’s equity as collateral, without altering your original mortgage. In other words, you keep your existing first mortgage and add a second loan that is secured by your home.

When you get a second mortgage, you receive funds by borrowing against the equity you’ve built in your property. You must continue paying your primary mortgageand the new second mortgage simultaneously. Because the second mortgage is secondary to the first in claim (it’s a second lien on your home), it often comes with a higher interest rate to compensate for the lender’s higher risk. Common types of second mortgages include:

• Home Equity Loan: a lump-sum loan with a fixed interest rate and fixed monthly payments. You get all the money at once and repay it over a set term.
• HELOC (Home Equity Line of Credit): a revolving credit line you can draw from as needed, up to an approved limit, during a draw period. HELOCs usually have variable rates and you initially pay interest-only on the amount you use. After the draw period, you repay the balance in installments.

In Canada, lenders typically allow you to borrow up to 80% of your home’s value in total (combined 1st and 2nd mortgages). For example, if your Toronto home is worth $800,000 and your current mortgage balance is $600,000, the maximum second mortgage might be around $40,000 (to bring the total loans to 80% of $800,000). Keep in mind you’ll need at least 20% equity (and often more) to qualify for a second mortgage, and the exact amount also depends on your credit and lender policies.

Important: Because a second mortgage is secured by your home, failing to repay either your first or second loan could lead to foreclosure. If you default, the primary mortgage lender is paid first, and the second mortgage lender only gets what’s left, which is why second loans carry higher rates and strict terms. Always ensure you can comfortably manage two mortgage payments each month before taking a second mortgage.

What is Mortgage Refinancing?

Answer:Refinancing your mortgage means replacing your existing home loan with a new mortgage – ideally one with better terms, a different rate, or a higher principal to pull out cash. When you refinance, your new loan pays off your original mortgage, so you end up with one mortgage again (not two).

Homeowners in Canada refinance for a few main reasons: to get a lower interest rate, to adjust the loan term (e.g. switch from a 5-year to a 10-year term), to change the mortgage type (for example, from a variable-rate to a fixed-rate), or to access home equity as cash (known as a cash-out refinance). Essentially, refinancing is like “resetting” your mortgage with new terms that better fit your current needs.

There are two common types of refinancing:

• Rate-and-Term Refinance: You take a new loan mainly to get a lower interest rate or a different term (amortization period) without increasing the loan amount. This can reduce your monthly payment or help you pay off the mortgage faster. For example, if interest rates have dropped since you got your original mortgage or your credit score improved, you might refinance to a lower rate and save money.
• Cash-Out Refinance: You refinance into a larger loan than what you currently owe and take the difference in cash from your equity. This is a way to unlock equity for things like home renovations, debt consolidation, or other big expenses. For instance, replacing a $300,000 mortgage with a new $350,000 mortgage could give you roughly $50,000 (minus fees) in cash at closing.

Refinancing involves a similar process to your initial mortgage: you’ll apply with a lender, provide income and credit documents, and often need a home appraisal to confirm the current value. You also have to pay closing costs (like appraisal fee, legal fees, possibly a refinancing fee), which can range from ~2% to 5% of the loan amount. In Canada, if you refinance before your mortgage term ends, note that you’ll likely face a prepayment penalty for breaking the mortgage contract (often 3 months’ interest or an interest-rate-differential charge). It’s wise to weigh these costs against the savings or cash you’ll gain by refinancing.

Key Differences Between a Second Mortgage and a Refinance

Answer: The core difference is that a second mortgage is an additional, second loan alongside your original mortgage, whereas a refinancereplaces your original mortgage entirely with a new loan. This leads to several practical differences:

• Number of Loans: A second mortgage means you now have two loans (two payments each month), while a refinance leaves you with one loan (your new mortgage).
• Interest Rates: Second mortgages typically have higher interest rates than a refinance/cash-out refinance because the second lender takes on more risk as a junior lien. A cash-out refinance is a first lien, so it often comes at a lower rate than an equivalent second mortgage would.
• Monthly Payments: With a second mortgage, you’ll be paying your original mortgage and the second loan each month (two separate bills). With a refinance, you only have one payment (though it might be higher than your old one if you cashed out equity, it replaces the old payment).
• Loan Terms: Refinancing gives you an opportunity to change the terms of your loan – for example, you might extend the amortization for smaller payments or switch to a fixed rate – which you cannot do with a second mortgage. A second mortgage leaves your first loan’s rate and term untouched (which can be good if you already have a great rate on that first loan).
• Upfront Costs:Closing costs for refinancing are usually higher. When you refinance in Canada, you’ll pay appraisal, legal, and possible lender fees (often thousands of dollars). In contrast, many home equity loans or second mortgage lenders cover some or all of the upfront fees. This means getting a second mortgage can involve less out-of-pocket cost to set up, although some second mortgages (especially from private lenders) do have setup fees of their own.
• Access to Equity: Both options let you tap into your home equity, but there are limits. With a second mortgage, lenders might allow you to borrow up to 80% of your home’s value minus the existing mortgage balance. A cash-out refinance similarly maxes out around 80% loan-to-value for most lenders (in fact, Canadian banks often use the same 80% rule across refinancing and home equity loans). One difference: a second mortgage might give you flexibility to only use what you need if it’s a HELOC, whereas a refinance gives you a lump sum if you cash out. Also, with a second mortgage or HELOC, a portion of your equity must remain untouched (you can’t borrow it all) – for example, banks often require you to keep 20% equity in the home.
• Risk and Security: Both loans use your house as collateral, so failing to pay either can lead to foreclosure. However, because a second mortgage is subordinate, if worst-case scenario happens, the first mortgage gets paid off first from a sale, and the second mortgage lender might not get fully repaid. This is the lender’s risk – as a borrower, the risk to you is losing the home if you can’t pay one or both loans.

In summary, a second mortgage is separate financing on top of your current loan (two loans total), whereas a refinance is one new loan that ideally has better terms or lets you cash out equity by replacing the old loan. Second mortgages usually carry higher interest but lower upfront costs, and refinancing can offer lower interest and the chance to restructure your mortgage but with higher upfront costs and potential penalties.

Pros and Cons of a Second Mortgage

Taking out a second mortgage has distinct advantages and drawbacks. Let’s break them down:

Pros of a Second Mortgage:

• Keep Your Existing Low Rate: You don’t have to touch your first mortgage. This means if you have a great interest rate on your primary mortgage, you keep it intact. The second mortgage simply adds financing without changing the terms of your original loan. In today’s market, many Toronto homeowners have low fixed rates from previous years – a second mortgage lets you access equity without refinancing into a higher rate on the whole balance.
• Access Equity for Cash Needs: A second mortgage (especially a lump-sum home equity loan) gives you a way to get a large amount of cash for home renovations, tuition, debt consolidation, etc., relatively quickly. You can often borrow a significant sum (up to the allowable equity limit) in one go.
• Flexible Options (Loan or Line): Second mortgages come in two flavors – a one-time home equity loan or a flexible HELOC. This flexibility means you can choose how to receive and repay the funds. For example, if you need a set amount for a one-time expense, a fixed-rate home equity loan might be best. If you have an ongoing project or uncertain costs, a HELOC gives you a “use-what-you-need” credit line. This choice isn’t available when refinancing (which is one lump sum event).
• Lower Upfront Fees: Second mortgages often have lower closing costs – or sometimes none at all – compared to refinancing. Many home equity loan lenders cover appraisal or legal fees to win your business. Even if fees aren’t fully waived, they might be smaller since you aren’t paying all the typical costs of setting up a brand new primary mortgage. This can save you money upfront, making second mortgages cost-effective for shorter-term needs.
• Easier Approval (in some cases): It can be easier to qualify for a second mortgage, especially through alternative lenders, than to refinance your first mortgage. If your income or credit score isn’t high enough for a big bank refinance, you might still secure a second mortgage (possibly at a higher rate) from a specialty or private lender. Essentially, second mortgage lenders may be more flexible since their loan is smaller and they have your house as collateral.

Cons of a Second Mortgage:

• Higher Interest Rate: A second mortgage almost always comes at a higher interest rate than a first mortgage refinance. Because the second lender is second in line if you default, these loans are riskier for the lender, and they charge accordingly. You might find second mortgage rates are a few percentage points higher than current primary mortgage rates. Over the loan’s life, this means you’ll pay more interest compared to refinancing (if you could qualify for a low refi rate).
• Two Mortgage Payments: Now you have an additional monthly payment to budget for. This can stretch your finances. Missing a payment on either your first or second mortgage could put your home at risk. The extra payment also adds to your monthly debt load, which might be a strain if your income isn’t keeping up. It’s crucial to be confident you can handle paying both loans every month.
• No Change in Original Terms: While keeping your first loan is an advantage when that loan is favorable, it’s a disadvantage if you were hoping to change anything about it. A second mortgage does not let you renegotiate or improve the terms of your main mortgage. For example, if your first mortgage has a high rate or only a few years left on term, a second mortgage won’t lower that rate or extend the term – you’d still possibly need to refinance in the future.
• Risk of Foreclosure: Just like any home loan, a second mortgage uses your house as collateral. If you fail to pay the second mortgage, the lender can ultimately foreclose (forcing the sale of your home) even if you’re current on the first mortgage. Having two loans increases the pressure – you must stay on top of both. In tough times (job loss, emergencies), the second mortgage could be harder to juggle and increase the chance of default. Essentially, you’re putting your home on the line for the amount you borrow, so it must be for a worthwhile purpose.
• Additional Fees and Shorter Terms: Some second mortgages (particularly from private lenders) can come with their own setup fees or higher penalties. They may also be structured as interest-only or shorter-term loans (e.g., a 1 or 2-year term before requiring renewal or payoff). These factors can add cost or complexity. Always read the terms: for instance, a 1-year second mortgage might solve a short-term need but you’ll need a plan to pay it off or refinance it later.

Pros and Cons of Refinancing Your Mortgage

Refinancing your mortgage – whether it’s a simple rate reduction or a cash-out refinance – also has benefits and drawbacks to weigh:

Pros of Refinancing:

• Lower Interest Rate & Monthly Payment: The most common reason to refinance is to snag a lower interest rate than your current one. If rates have dropped since you got your mortgage or your credit profile improved, refinancing can reduce your rate and save you money on interest each month. A lower rate or a longer amortization can significantly cut your monthly payment, freeing up cash in your budget. Over time, the interest savings can be substantial if the rate drop is big enough.
• Ability to Change Loan Term or Type: Refinancing gives you the chance to restructure your mortgage. You could shorten the term (say, from 20 years remaining down to 15 years) to pay off the home faster and save interest, or lengthen it to 25-30 years to lower payments if cash flow is an issue. You can also switch from a variable rate to a fixed rate for stability (or vice versa). This flexibility can help you better align the mortgage with your current financial goals (e.g., become mortgage-free by retirement, or reduce risk if you expect rate hikes).
• One Payment (Simpler Finances): When you refinance, you still only have one mortgage payment each month, since the refinance replaces your old loan. This keeps things simple compared to managing a first and second loan. It also means you’re only dealing with one lender and one set of statements. If you’re consolidating debt via refinance, it can simplify multiple bills into one as well.
• Tap Home Equity at Lower Rate: A cash-out refinance lets you access your home’s equity in cash for uses like home improvements, investing, or paying off high-interest debts. Importantly, because it’s a first-lien mortgage, the interest rate on a cash-out refi is usually lower than rates on second mortgages or credit cards. This makes refinancing a cost-effective way to borrow large amounts. For example, using a refinance to pay off credit card debt can dramatically cut the interest you pay, since mortgage rates (even slightly higher cash-out rates) are far lower than credit card rates.
• Potential to Eliminate PMI/CMHC Insurance: If your home value has gone up or you’ve paid down a lot of your mortgage, refinancing might help you remove private mortgage insurance (PMI) in the US or finish paying off CMHC insurance in Canada. Once you have 20%+ equity, a new loan wouldn’t require PMI. This can save money each month. (On existing Canadian insured mortgages, you won’t get a refund of past CMHC premiums, but new refinances at low LTV won’t need insurance.)
• Opportunity to Add a Co-signer or Remove One: Refinancing is also a vehicle to change who is on the mortgage. For instance, if you originally bought with a co-signer or a partner and want to remove them (or add someone new), a refinance can accomplish that, subject to qualifying the remaining/new borrowers.

Cons of Refinancing:

• Closing Costs and Fees: Refinancing isn’t free. You will face closing costs, which include things like an appraisal fee, legal fees for the new mortgage registration, possible lender application fees, and even mortgage default insurance if you increase your loan above 80% LTV. Typically, refinancing costs range from about 2% to 5% of the loan amount in fees. For example, on a $400,000 mortgage refinance, you might pay $8,000 – $15,000 in various charges. These costs are often due at closing (though sometimes they can be rolled into the loan). If the monthly savings from a rate reduction are small, it can take years to break even on these costs. Always calculate your break-even point – how many months of lower payments it takes to recoup the cost of refinancing.
• Prepayment Penalties (Breaking the Mortgage): In Ontario and across Canada, most fixed-rate mortgages have a prepayment penalty if you refinance (break) before the term is up. This could be three months’ interest or an interest rate differential (IRD) charge, whichever is higher. These penalties can be very costly, sometimes running into the tens of thousands if you’re only partway through a long fixed term at a low rate. A hefty penalty can wipe out the benefit of refinancing. It often makes sense to wait until your term is nearly done (or you’re in an open mortgage) to avoid this cost.
• Risk of a Higher Rate (Market Conditions): Refinancing doesn’t guarantee a better rate – it depends on current market rates and your qualifications. If rates have risen since your original loan, refinancing now could force you into a higher interest rate, increasing your payment. For example, many homeowners in 2021 had mortgages around 2-3%; by 2025 rates might be 5%+. Refinancing in that scenario, even to tap equity, means trading up to a higher rate on your entire balance – which could cost you more in interest overall. With a second mortgage, by contrast, you’d at least keep your original mortgage at 2-3% and only pay the higher rate on the new funds. This is why refinancing is often most attractive when current rates are lower than your existing rate.
• Longer-Term Interest Costs: If you extend your loan term when refinancing (e.g., restarting a 25-year amortization), you might lower your monthly payment, but you could end up paying more interest in total over the life of the loan. Essentially, you’re resetting the clock. For instance, if you have 15 years left and you refinance into a new 25-year loan to reduce payments, you’ll be in debt 10 extra years and accumulate more interest unless you plan to prepay. It’s a trade-off: short-term relief versus long-term cost.
• Tougher Qualification Process: Getting approved for refinancing can sometimes be harder than getting a second mortgage, especially if your financial situation has changed for the worse. Lenders will check your credit score, income, employment, and home value. If your credit score has dropped or your income isn’t as high as before, you might not qualify for a better rate or large enough refinance. Also, if the housing market has slowed and your home’s appraised value isn’t as high as you think, you might not have enough equity to refinance for the amount you want. In contrast, some second-mortgage lenders (like private lenders) focus more on the home equity and less on strict income ratios.
• No Turning Back on Terms: Once you refinance, you’re committed to the new loan’s terms. If you refinanced to take cash out, you now have a higher mortgage balance to repay. If you refinanced from a fixed to a variable and rates rise, you could face higher payments than expected. Essentially, if not done for the right reasons, refinancing could leave you worse off – for example, rolling unsecured debt into your mortgage can be wise for interest savings, but it also turns that portion of debt into secured debt against your home (and you might be tempted to rack up cards again). It’s important to be disciplined and ensure the refinance aligns with a long-term plan.

Should You Refinance or Get a Second Mortgage?

Answer:It depends on your situation and goals. A second mortgage can be better if you want to leave your first mortgage alone (especially if it has a low rate or you’d incur big penalties to break it) and just need to borrow extra cash. Refinancing can be better if you want to improve your overall mortgage terms or access equity at a lower interest rate. Let’s break down when each option makes sense:

When to Choose Refinance?

If interest rates today are lower than your current rate, refinancing your entire loan can save you money. For example, maybe you bought your home years ago at a 5% rate and now you can refinance in the 3%-4% range – that’s a clear win. Or perhaps you have a 25-year amortization remaining but can afford higher payments; refinancing into a 15-year term will help you pay off the house faster.

Also, if you have a bunch of high-interest debt (credit cards, car loans), doing a cash-out refinance to pay them off could simplify your finances and reduce your interest costs. A rate-and-term refinance is generally the best choice when you simply want a lower monthly payment or interest rate on your mortgage. Likewise, if you’re paying for mortgage insurance (CMHC insurance or PMI) and now have enough equity, refinancing might remove that extra cost.

However, remember to time it so that penalties are minimal – for instance, consider refinancing at renewal time if possible (in Canada you can switch lenders or refinance at the end of your term with no penalties).

When to Choose A Second Mortgage?

A second mortgage is often the go-to for homeowners who already have a great deal on their first mortgage but have new cash needs. Say you locked in a 5-year fixed at 1.99% in 2021 (lucky you!) and now in 2025 you want to borrow $50,000 for a home renovation.

Market rates might be ~5-6%. Refinancing the entire mortgage at 5-6% would make your whole balance costlier. Instead, keeping that $50K as a second mortgage at perhaps ~8-10% for a short period might be more cost-effective overall, since your main $500K mortgage stays at 1.99%. Additionally, if your credit or income situation has deteriorated such that you can’t refinance easily, a second mortgage from an alternative lender can be a lifeline to tap equity.

HELOCs (home equity lines) in particular are great if you need flexible funding over time – for example, a series of home improvements or to have an emergency fund. They let you borrow as needed and pay interest only on what you use. In short, choose a second mortgage when you need equity out, but it’s not advantageous or possible to replace your first mortgage. Just be prepared for the higher interest on that second loan and have a plan to pay it off (many use a second mortgage as a short-to-medium term solution).

Consider an example: If you need money for a major expense like a home addition or sending a child to university, both a cash-out refinance and a second mortgage could work. If you value predictability and a single payment, a refinance might be better – you’ll get the cash and have just one mortgage to pay (hopefully at a decent rate).

But if flexibility is key (you’re not sure exactly how much you’ll need, or you want to borrow in stages), a HELOC second mortgage is very handy. On the other hand, if your priority is getting the lowest possible interest rate on the money you borrow and you’re willing to restructure your main mortgage for it, then refinancing is likely the better route.

Few Rules of Thumb to Help Decide

• Don’t refinance to a higher rate:

If current mortgage rates are significantly higher than the rate on your existing mortgage, a full refinance will increase your borrowing costs. In this case, if you really need equity, a second mortgage might be cheaper overall (despite its higher rate) because it’s only on the portion you need and you keep your low rate on the original balance.

• Consider time horizon:

If you plan to sell your home in a short time (say 1-3 years), think twice about refinancing – the upfront costs and penalties might not be worth it if you won’t hold the mortgage long enough to recoup them. A short-term second mortgage could be a better stopgap to hold you over. Conversely, if you’re staying long-term and can score a much better rate by refinancing, the savings will compound over years, making it worthwhile.

• Penalty check:

Always factor in any prepayment penalty on your current mortgage when looking at refinancing. If the penalty is huge (which can be the case if you’re in the early/middle of a fixed term in Canada), a second mortgage can bypass that. Sometimes the math favors taking, say, a 2-year second mortgage and then refinancing later when your term is up (penalty-free). On the flip side, if you’re at the end of your term or in a open/variable mortgage with minimal penalty, refinancing becomes more attractive.

• Qualification and Speed:

If you need the money quickly or you worry you won’t qualify under the strict guidelines for a new mortgage (maybe your income is a bit low for the stress test, or you’re self-employed with lower reported income), a second mortgage from a broker or private lender can be easier to secure fast. Refinancing with a prime lender will require full income verification and meeting the current stress test (qualifying at a high interest rate). Second mortgages often focus more on the equity in your home, so they might approve when banks won’t – albeit at higher cost.

• Long-term Cost vs. Short-term Need:

Think about the total cost. Refinancing usually offers lower interest, which is better if you’ll repay over a long time. Second mortgages have higher rates, so they’re best used for shorter periods or smaller amounts that you plan to pay off in a few years. If you’re looking at a one-time expense that you can aggressively pay down (or that will pay for itself, like a value-adding renovation), a second mortgage can do the job. If you’re restructuring a large amount of debt and need many years to comfortably pay it, rolling it into a 25-year refinance might result in a much lower rate and monthly payment.

Every homeowner’s case is unique. It’s often helpful to speak with a mortgage professional about the numbers. They can help calculate your effective costs for each option (factoring in interest, fees, penalties, etc.). At Turkin Mortgage (Toronto), for example, we sit down with clients to review their equity, current mortgage terms, and needs to recommend the optimal solution. The goal is to choose the option that meets your financial need at the lowest overall cost and risk.

Frequently Asked Questions (FAQs)

Is it easier to qualify for a second mortgage than to refinance?

Often yes. Second mortgages (especially through alternative or private lenders) can be easier to qualify for because lenders focus on the home equity you have, rather than strictly on income and credit scores. Many second-mortgage lenders will work with credit scores under typical bank requirements (some may approve scores under 600, albeit at higher interest). Refinancing with a prime lender usually requires you to pass the mortgage “stress test” and have good credit and income to carry the new loan.

So if your credit has taken a hit or your income is hard to verify, a second mortgage might be more accessible. However, easier approval comes at a cost – you’ll likely pay a higher interest rate on that second loan as compensation for the lender’s added risk. Always ensure you can handle the payments, because even if it’s easier to get, a second mortgage still puts your home on the line.

How much of my home equity can I access with a second mortgage or refinance?

In Canada, lenders typically allow you to borrow up to 80% of your home’s appraised value in total home loans. This 80% loan-to-value (LTV) limit applies whether you refinance or take a second mortgage.

For example, if your property is worth $500,000 and you have a $300,000 balance on your first mortgage (which is 60% LTV), the maximum additional borrowing might be up to $100,000, bringing you to 80% LTV ($400,000 total debt on $500,000 value). With a refinance, that means the new mortgage cannot usually exceed $400,000 in this example. With a second mortgage, the second loan plus the existing $300,000 loan would typically be capped around $400,000 total. Keep in mind that 80% is a general guideline for federally regulated lenders – some private second mortgage lenders might extend beyond 80% LTV in special cases, but at even higher rates and with more risk. Also note, for a HELOC (home equity line of credit) specifically, Canadian banks set a slightly different rule: the HELOC portion can be at most 65% LTV on its own, but you can combine a HELOC and mortgage to reach 80% total. In any case, you cannot borrow 100% of your equity; lenders require you to retain some equity as a cushion.

Are interest rates higher on a second mortgage?

Yes. Second mortgages generally come with higher interest rates than a primary mortgage or a refinance. The second mortgage lender is taking a subordinate position (they’re second in line to be paid if you default), which is riskier for them. To offset that risk, they charge higher rates. For instance, if current refinance rates for prime customers are around 5%, a second mortgage rate might be 8 – 15% depending on the lender and your credit.

The exact rate also depends on whether it’s a home equity loan (often fixed rate) or a HELOC (variable rate), and on your creditworthiness. By contrast, a refinance is a first (primary) mortgage; those rates are usually the lowest available residential rates. Keep in mind that while second mortgage rates are higher, they might still be lower than rates on unsecured debt like credit cards or personal loans.

That’s why someone might use a second mortgage to consolidate debt – even at, say, 10% it’s cheaper than 19.99% on a credit card. But if you qualify to refinance your entire mortgage at 5%, that’s clearly cheaper than taking a second mortgage at 10%. Always compare the Annual Percentage Rate (APR) and total interest cost of both options for your scenario.

Will I have to pay a penalty or special fees to refinance my mortgage in Canada?

If you refinance before your current mortgage term is finished, yes, you will likely incur a prepayment penalty on your existing mortgage. In Canada, most fixed-rate mortgages come with a penalty for breaking the term early, which is usually the greater of 3 months’ interest or an Interest Rate Differential (IRD) amount.

The IRD is calculated based on how far interest rates have fallen since you took out your mortgage, applied to the remaining term – it can be quite steep if rates dropped or if you still have a lot of time left in your term. For variable-rate mortgages, penalties are typically 3 months’ interest. These penalties are essentially a fee to the lender for you paying off the loan early. Besides the penalty, a refinance involves closing costs similar to a new mortgage: an appraisal fee (to assess your home’s value), legal fees for registering the new mortgage, and possibly a lender application or insurance fee. Some lenders offer “no-fee” refinancing where they’ll cover some costs, but usually in exchange for a slightly higher rate or adding the costs to your balance.

If you refinance at the end of your term, you can often avoid penalties – that’s usually the best time to do it if you can wait, because the mortgage is open for renegotiation. Always ask your lender to calculate your penalty before you proceed with a mid-term refinance, so you can factor it into your decision. Sometimes, the savings from a refinance still outweigh the penalty; other times, it’s better to wait or consider a second mortgage to avoid the fee.

Is a HELOC different from a second mortgage, or is it the same thing?

A HELOC (Home Equity Line of Credit)is a type of second mortgage. It’s different in how you borrow and repay, but it still uses your home equity as collateral just like a standard second loan. With a HELOC, instead of receiving a lump sum, you get a revolving credit line – you can borrow, repay, and borrow again up to your limit during the HELOC’s draw period.

It works a bit like a credit card secured by your house. In contrast, a typical second mortgage (often called a home equity loan) gives you one lump sum that you pay back in installments with a fixed schedule. Both are considered second mortgages because they’re secured by home equity and sit behind your first mortgage.

When deciding between them, consider your needs: choose a HELOC if you want ongoing access to funds or aren’t sure exactly how much you’ll need over time (for example, planning multiple home improvement projects or needing an emergency fund). Choose a closed home equity loan (lump sum) if you have a one-time specific expense and prefer the certainty of a fixed interest rate and fixed payment. In terms of rates, HELOCs usually have variable rates, which can go up or down with prime rate, while home equity loans often have fixed rates.

Canadian banks also limit HELOCs to 65% of your home’s value for the revolving credit portion (though they can combine a HELOC with a mortgage). In summary, a HELOC is simply one form of second mortgage – one that offers flexibility in borrowing. It can be a great alternative to refinancing or to a standard second loan if you value liquidity and flexibility, but be disciplined because it’s easy to borrow, and you don’t want to overextend against your home.

Bottom Line

Both second mortgages and refinancing are useful tools for homeowners in Ontario to leverage home equity – but they serve different purposes. A second mortgage lets you add a loan for cash without changing your original mortgage (ideal if your first mortgage is at a fantastic rate or nearly paid off), whereas refinancing allows you to modify or replace your mortgage (ideal if you can get better terms or want to consolidate everything). Always consider the interest rate, fees, and risks of each option.

If you’re unsure which route is best, consult with a mortgage professional. Turkin Mortgage in Toronto, for instance, can review your situation and help you compare the cost of refinancing versus a second mortgage, ensuring you make an informed decision that saves you money and suits your needs. Remember, the right choice is the one that improves your financial position while keeping your home secure.