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Both products turn some of your home equity into cash. They differ in what happens to the mortgage you already have, and that one difference drives most of the cost.
The side-by-side
| Second mortgage | Refinance | |
|---|---|---|
| What happens to your first mortgage | Stays as it is | Replaced by a new mortgage |
| Limit | Up to 80% of appraised value, minus the mortgage balance | Up to 80% of appraised value for the new first mortgage |
| Rate | Fixed or variable, usually higher than a first mortgage | The rate on the new first mortgage, applied to the whole balance |
| Payments | Second payment on top of the first | One payment on a larger mortgage |
| Cost to set up | Appraisal, title and legal fees, and often lender and broker fees | New mortgage costs, plus any charge for ending the old one early |
| Main risk | A shorter term that comes due, and a higher rate | Paying a higher rate on money you already owed |
The 80% limit and the description of a second mortgage come from the Financial Consumer Agency of Canada. The 80% maximum for uninsured mortgages comes from OSFI.
Why they differ
A refinance is a new first mortgage. The lender pays out the old one, and you start fresh on the new rate, term and amortization, the number of years over which the loan is repaid. A second mortgage is a separate loan registered behind the first. If the home were sold, the first mortgage would be repaid first and the second after it. That ranking is the reason the second usually costs more, since the agency says lenders see it as riskier.
Keep that in mind when you hear “just refinance”. It means you give up your existing rate, and that matters most when your current rate is lower than today’s.
What each costs
The refinance carries a cost that people often miss: the charge for ending your old mortgage before its term is up. Your contract sets that charge, so ask your lender for the figure in writing before you compare anything. The agency also lists appraisal, title search, title insurance and legal fees among the costs of borrowing against your home.
A second mortgage has those fees plus a lender fee and often a broker fee. The first worked example adds up one year of each. It also shows the effect that matters most: the refinance charges the new rate on all $450,000, while the second mortgage charges the high rate on $50,000 only.
Year one is not the whole story. A refinance charge is paid once, while a second mortgage’s higher rate runs for as long as you hold the loan. If you plan to keep the money for several years, the picture can shift, so compare over the period you will really hold it.
What each risks
Both put the home behind a new loan, and the agency warns that if you cannot repay you may face serious consequences, including foreclosure. The shapes differ.
A refinance risks a larger first mortgage and a longer commitment to a new rate. If rates are lower than yours when you refinance, that works in your favour. If they are higher, you pay more on everything.
A second mortgage risks the end date. A short term means a balance may come due while your first mortgage is still running, and you will need a plan to repay or replace it. Two payments each month also leave less room for a bad month.
Which situation suits which
A refinance tends to suit someone whose current rate is at or above today’s, whose term is near its end, or who needs a large amount that justifies a full reset. A second mortgage tends to suit someone with a low rate worth protecting, a smaller amount to borrow, or a home where the first mortgage lender will not allow more.
Neither suits someone whose income no longer covers the payments. In that case look at the options for people who are behind before borrowing. Compare real quotes in the calculator, and see how a HELOC compares too.
How the timing changes the answer
Where you are in your mortgage term matters as much as the product. Suppose your term ends in four months. A refinance at renewal may avoid the early ending charge altogether, because you are changing lenders or terms at a natural break. Suppose instead you are in the first year of a five year term at a low rate. Ending that mortgage early could be the most expensive thing you do, and a small second mortgage on top may leave the cheap rate alone.
Ask yourself three plain questions. When does the current term end? How does my rate compare with what lenders are quoting now? How long will I need this money? A short need favours the route with the smaller lasting commitment. A long need favours whichever route has the lower rate on the larger balance.
Also think about who you would be dealing with. A refinance means a full application on the whole mortgage, with income and credit reviewed. A second mortgage can be arranged without touching the first lender, and some borrowers prefer that. Others dislike having two lenders, two payments and two sets of paperwork.
Questions to ask before you choose
Ask your current lender for the exact charge to end your mortgage early and the date your term ends. Ask the new lender what the all in cost is in dollars across the period you will hold the loan. Ask what happens at the end of the term, and what it would cost to repay early.
If you want to talk to a licensed mortgage professional about either route, you can check your options. It is a request, and you can say no.
Needing $50,000 on a $700,000 home that has a $400,000 first mortgage
Made-up figures. The existing first mortgage is $400,000 at an assumed 3%. A refinance would replace it with $450,000 at an assumed 5.5%, with an assumed $6,000 charge for ending the old mortgage and $1,500 for legal and appraisal. The second mortgage is $50,000, interest only at an assumed 12%, with an assumed 2% lender fee, 1.5% broker fee and $1,500 for legal, appraisal and title. Interest is shown for one year with no principal paid.
- Refinance: interest on $450,000 for a year
- $24,750
- Refinance: early ending charge and legal
- $7,500
- Refinance total in year one
- $32,250
- Second mortgage path: interest on the $400,000 first mortgage
- $12,000
- Second mortgage path: interest on $50,000
- $6,000
- Second mortgage path: fees
- $3,250
- Second mortgage path total in year one
- $21,250
$450,000 at 5.5%
$6,000 plus $1,500
$400,000 at 3%
$50,000 at 12%
$1,000 lender, $750 broker, $1,500 legal and other
Room to borrow on a $700,000 home owing $400,000
Made-up figures, using the 80% of appraised value limit that the Financial Consumer Agency of Canada publishes for a second mortgage and that OSFI gives as the legal maximum for an uninsured mortgage. Individual lenders may set lower limits.
- Home value
- $700,000
- 80% of value
- $560,000
- Owed on the first mortgage
- $400,000
- Most a lender might consider
- $160,000
$700,000 x 0.80
Questions people ask
Does a refinance always cost less than a second mortgage?
No. A refinance usually has a lower rate on the new loan, but it applies that rate to the whole balance and may bring a charge for ending the old mortgage early. If your current rate is low, keeping it and adding a small second loan can cost less.
How much can I borrow with each?
The Financial Consumer Agency of Canada says lenders usually lend up to 80% of the home's appraised value for a second mortgage, minus your mortgage balance. OSFI says the legal maximum for an uninsured mortgage at federally regulated lenders is 80% of value.
Do I keep my current mortgage rate with a second mortgage?
Yes, your first mortgage keeps its terms, and the agency says you must keep paying it while you repay the second. The agency also notes that your lender may have to change the terms of the original agreement, so read it before borrowing.
What happens at the end of the term with each option?
A refinanced mortgage renews or is replaced like any first mortgage. A second mortgage often has a shorter term, so a balance can come due while the first mortgage is still running. Ask what the plan is for that date before you sign.
Can I refinance and still need a second mortgage later?
Yes, if the new first mortgage leaves equity under the lender's limit. A later second mortgage would sit behind the new first mortgage. Each step adds fees, so think about the whole sequence before choosing either.