A second mortgage leaves your first mortgage untouched, a HELOC gives flexible access if you qualify, and a refinance replaces everything and may trigger a prepayment charge. Get the prepayment figure first, then compare the total cost of each.
Borrowing against your home's equity usually comes down to three options: a second mortgage, a home equity line of credit (HELOC), or a refinance of your existing mortgage. They are not three versions of the same loan. A second mortgage is a separate loan registered behind your first mortgage. A HELOC is a revolving credit line secured against the home. A refinance replaces your first mortgage with a new, larger one and hands you the difference as cash. Which one costs least depends mostly on what you would have to give up to get it — and for many homeowners the deciding factor is whether breaking their current mortgage triggers a penalty.
The Financial Consumer Agency of Canada publishes a side-by-side comparison of home equity products. By its figures, a second mortgage can reach up to 80% of your home's appraised value minus your mortgage balance, a home equity loan up to 80% of the appraised value, and a HELOC up to 65% of the appraised value. It also notes that interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders, and that fees on these products can include an appraisal, a title search, title insurance and legal costs.
Those are general ceilings, not promises. Some lenders, particularly private lenders who focus on the property rather than your income, will go to a higher combined loan-to-value, and others will offer less depending on the property and your file.
A second mortgage is a second loan on your home. It has the same features as a mortgage, and while you pay it off you keep paying your first mortgage too. Its main advantage is that it leaves your first mortgage alone: if you locked in a low rate, you can borrow without touching it, and you receive the money as one lump sum. The trade-off is cost — the rate is generally higher than your first mortgage's, and terms are usually shorter. For the mechanics in more detail, see how a second mortgage actually works or our 2nd mortgage and equity takeout page.
A HELOC works much like a regular line of credit: you borrow what you need, repay it, and can borrow again up to your limit. FCAC describes the rate as variable, moving with market rates, and lists the limit at 65% of the appraised value. That flexibility is the appeal if you expect to borrow in stages, such as over a multi-phase renovation, and only pay interest on what you have used. The catch is qualification: a HELOC typically goes through a full income and credit review, and because the rate is variable, your cost can rise even if your balance does not.
A refinance replaces your current mortgage with a new, larger one, and you take the difference as cash. The upside is one mortgage and one payment, and possibly a better rate if market rates have fallen since you signed. The cost is that you are usually breaking your existing mortgage contract before the end of its term. FCAC lists breaking your mortgage contract among the actions that can lead to a prepayment charge, and says your lender must tell you how that charge is calculated. You will also typically go through full qualification again on the larger mortgage.
Before comparing rates, find out your prepayment charge in writing. If it is small, or your term is almost up, a refinance can win. If you would pay a large charge to give up a low rate, a second mortgage or a HELOC leaves your first mortgage untouched. Our guide to switching lenders at renewal covers the lower-cost moment to make a change, and the Switch & Save refinance calculator can help you size it up.
Take a home appraised at $800,000 with a $400,000 first mortgage, where the owner needs $60,000. Using FCAC's 80% ceiling, the room for a second mortgage is $640,000 minus $400,000, or up to $240,000, so $60,000 sits well inside it and the first mortgage stays exactly as it was. A refinance would instead replace the whole $400,000 with a $460,000 mortgage: every dollar of the original balance moves to a new rate and term, and any prepayment charge your lender quotes is a cost on top. These are round numbers for illustration, not a quote.
A second mortgage tends to fit when you have a low-rate first mortgage with time left, when you need a lump sum quickly, or when a bank would not approve a HELOC or refinance. A HELOC tends to fit when you want flexible, staged access and have the income and credit to qualify. A refinance tends to fit when your term is nearly finished, when today's rates beat your current one, or when you want to fold everything into a single mortgage. None of these is the right answer for everyone, which is why a side-by-side comparison on your actual numbers matters.
If a bank or credit union declines a HELOC or refinance — because of income that is hard to document, a recent credit issue or a tight timeline — a second mortgage from a private lender is approved primarily on property equity rather than income, and it can often be arranged in as little as 24 hours. See private mortgages in Ontario, or read what a bank decline actually means first. Keep expectations honest: private rates are higher and terms are shorter, so it works best as a bridge to cheaper financing rather than a permanent plan.
Ask what your prepayment charge would be to break your current mortgage, in writing. Ask for every fee, since FCAC lists an appraisal, a title search, title insurance and legal costs. Ask whether the rate is fixed or variable and for how long, whether you receive a lump sum or draw as needed, and what your exit plan is — when and how you move to cheaper financing.
Every one of these options is secured against your home. FCAC warns that if you cannot repay, you may face serious consequences, like the foreclosure of your home. That is why the exit plan matters more than the headline rate. This article is general information, not mortgage, legal or tax advice, and a mortgage agent can compare real offers for your file.
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