Should You Refinance or Get a Second Mortgage?

You’re a homeowner in Canada, and you’ve done everything right. You’ve built up valuable equity in your property. Now, you need to access that equity—maybe for a critical home renovation, to consolidate high-interest debt, or to invest in a new opportunity.

You know the money is there, but you’re facing a confusing and critical crossroads: Should you refinance your entire mortgage, or should you take out a second mortgage?

If you walk into your bank, they’ll likely give you a simple, one-size-fits-all answer. But this is one of the most important financial decisions you can make, and the wrong choice could cost you thousands—or even tens of thousands—of dollars.

The truth is, there is no single “best” answer. The right choice is a mathematical and strategic one that depends entirely on your unique situation: your current mortgage rate, your prepayment penalty, your timeline, and your goals.

This is where a mortgage broker becomes your most valuable asset. We don’t just find you a product; we are financial strategists who analyze your specific situation to find the most cost-effective path forward.

This guide will break down the exact differences between refinancing and a second mortgage, the pros and cons of each, and the critical factors that will determine the right choice for you.

The Two Paths: Understanding Your Options

Before we can compare, let’s get crystal clear on what these two products actually are. Both let you turn your home equity into cash, but they do it in completely different ways.

What is a Mortgage Refinance?

A refinance is an “all-in-one” solution. You are essentially replacing your entire existing mortgage with a brand new, larger one.

• How it works: Let’s say your home is worth $900,000, and you owe $400,000 on your mortgage. You need $70,000 in cash. You would apply for a new mortgage of $470,000.
• This new $470,000 mortgage pays off your old $400,000 mortgage, and the remaining $70,000 is given to you in tax-free cash.
• You are left with one single, larger mortgage payment going forward.

What is a Second Mortgage?

A second mortgage is an “add-on” solution. You are keeping your existing mortgage exactly as it is and adding a new, separate loan behind it.

• How it works: Using the same example, you keep your $400,000 mortgage untouched. You then apply for a separate $70,000 loan, which is registered on your property’s title in “second position.”
• You receive the $70,000 in tax-free cash.
• You are left with two separate payments each month: your original $400,000 mortgage payment and your new $70,000 second mortgage payment.

The Case for Refinancing: Simplicity and Low Rates

Refinancing is a powerful tool, and in the right situation, it’s the clear winner.

Pros of Refinancing:

• One Simple Payment: It’s clean. You only have one mortgage payment to manage, which simplifies your budget.
• Potentially the Lowest Rate: You are applying for a “first mortgage,” which (in a normal market) will have the lowest, most competitive interest rates available. You blend the new money and old money together at one new, low rate.
• Access to Large Amounts: If you need to borrow a very large amount of equity, refinancing is often the best and most stable way to do it, allowing you to amortize the new debt over a long period (like 25 or 30 years).

Cons of Refinancing:

• Prepayment Penalty: This is the single biggest—and most expensive—reason not to refinance. If you are in the middle of a 5-year fixed mortgage, your lender will charge you a massive penalty to break it. This is often the greater of 3 months’ interest or the dreaded Interest Rate Differential (IRD), which can easily be $10,000, $15,000, or even more.
• Losing a “Golden” Rate: Did you lock in a 1.99% or 2.49% fixed rate back in 2020 or 2021? If you refinance, you lose that incredible rate on your entire mortgage balance. You’ll be blending it with today’s higher rates, potentially costing you a fortune in the long run.
• Re-qualifying: You must re-qualify for the entire mortgage amount at today’s stress test rates, which can be a hurdle for some.

Bottom Line: Refinancing makes the most sense if you are at or near your mortgage renewal date (so there’s no penalty) or if current interest rates are significantly lower than your existing rate.

The Case for a Second Mortgage: Speed and Strategy

A second mortgage is a more surgical, strategic tool. Its primary job is to get you the cash you need without disturbing your main mortgage.

Pros of a Second Mortgage:

• Avoids Prepayment Penalties: This is the #1 reason to get a second mortgage. By leaving your first mortgage untouched, you completely avoid that $15,000 penalty. This saving alone often makes it the smarter financial move.
• Protects Your Low Rate: You get to keep your “golden” 1.99% rate on your main $400,000 mortgage. You only pay a higher rate on the new $70,000 you’re borrowing.
• Faster and More Flexible: Second mortgages (especially from alternative or private lenders) can often be funded much faster than a traditional refinance. They also can have more flexible qualification criteria.

Cons of a Second Mortgage:

• A Higher Interest Rate: This is the trade-off. The “interest rates for 2nd mortgages in Canada” are always higher than first mortgage rates. This is because the second-position lender is taking on more risk (if you default, the first mortgage lender gets paid back first).
• Two Separate Payments: You have to be organized and manage two mortgage payments each month.
• Potentially Higher Fees: Depending on the lender, setup fees can be higher than a standard refinance.

Bottom Line: A second mortgage makes the most sense if you are locked into a great low rate on your first mortgage and/or are facing a massive prepayment penalty that would wipe out any savings.

Your Broker’s Role: The Cost-Benefit Analyst

This is where we come in. As your mortgage broker, our job is to run the numbers on both scenarios and present you with a clear, mathematical comparison.

Your bank will not do this for you. They will only present their product.

Here is the exact analysis we will perform:

Scenario A: Refinance

• What is your exact prepayment penalty? (We will call your lender and get this number to the dollar).
• What are the legal and appraisal fees to set up the new mortgage?
• What will your new, single payment be at today’s blended rate?
• Total Cost = Penalty + Fees + Total Interest Paid over [X] years

Scenario B: Second Mortgage

• What are the setup fees (broker and lender/legal) for a second mortgage?
• What will your two payments (1st + 2nd) add up to?
• Total Cost = Fees + Total Interest Paid on 2nd + Total Interest Paid on 1st

We then lay these two scenarios side-by-side. In many cases, the math clearly shows that paying a slightly higher interest rate on a $70,000 second mortgage for a few years is VASTLY cheaper than paying a $15,000 penalty just to get a slightly lower rate.

This analysis is the only way to know for sure whether you should “take out a 2nd mortgage” or pursue a refinance. We provide the data so you can make an informed, confident decision.

Advanced Strategy: Using a Second Mortgage as a “Bridge”

This is a very common and powerful strategy we use for our clients.

The Situation: You need cash right now, but your mortgage is up for renewal in the next 12 to 18 months.

The Problem:

• Refinancing now is a terrible idea. You’ll pay a significant penalty (for the remaining 12-18 months of your term) only to have to do it all over again in a year or so at renewal.
• A full 5-year second mortgage might be overkill. You don’t need a long-term solution.

The “Bridge” Solution: This is the perfect scenario for a short-term second mortgage.

• Today: We get you a 12 or 18-month open or short-term second mortgage. This gives you the $70,000 cash you need immediately.
• You avoid all penalties on your first mortgage.
• In 12-18 Months: When your first mortgage matures (and is penalty-free), we now have a perfect opportunity.
• At Renewal: We “blend” or combine your original $400,000 mortgage and your $70,000 second mortgage into one brand new, single first mortgage.

This strategy gives you the best of all worlds: you get the cash you need today, you completely avoid all prepayment penalties, and you end up with a simple, single mortgage payment at a great rate once your term is up. It’s a patient, strategic play that saves you thousands.

How to Make Your Final Decision

So, what’s the right call for you? Here is a simple checklist:

You should strongly consider refinancing if:

• You are at or within a few months of your mortgage renewal date (no penalty!).
• Your current mortgage rate is higher than today’s available rates.
• Your prepayment penalty is very small (e.g., just 3 months’ interest).
• You strongly prefer the simplicity of one, single mortgage payment.

You should strongly consider a second mortgage if:

• You are locked into a fantastic, low interest rate on your first mortgage.
• Your prepayment penalty is massive (a high IRD).
• You need the cash very quickly.
• Your mortgage is renewing in 1-2 years (allowing you to use the “bridge” strategy).

Ultimately, this isn’t a decision you should ever make by guessing. Your home equity is your most powerful financial tool. Before you do anything, let a professional strategist run the numbers. We can show you, in black and white, which path will leave more money in your pocket.