Refinance, HELOC or second mortgage: which should I choose?

In Canada, choosing a refinance, HELOC or second mortgage usually depends on how much you need, whether you need it all at once, and what breaking your mortgage costs. A refinance replaces your mortgage with a larger one. A HELOC gives you a revolving line of credit secured on your home, and a second mortgage adds a separate loan behind your existing one.

Refinance

A refinance pays off your current mortgage and replaces it with a new, larger one. With a federally regulated lender, the new mortgage can go up to 80% of your home's appraised value.

A refinance suits you when you need a lump sum and are at, or close to, the end of your term. A refinance also suits you when the penalty for breaking early is small. You get one payment, usually at a first-mortgage rate.

The trade-offs: if you are mid-term, you pay a prepayment penalty, usually the higher of three months' interest or the interest rate differential. You also pay legal and appraisal costs, and you re-qualify under the stress test.

Home equity line of credit (HELOC)

A HELOC is a line of credit secured on your home. You draw on it when you need to, repay, and draw again. The revolving portion is capped at 65% of your home's value; combined with your mortgage, the total can reach 80% (source: OSFI and the Financial Consumer Agency of Canada).

A HELOC suits you when you need money in stages, such as a renovation paid over months, or want a standby reserve. HELOC rates usually move with prime, and many allow interest-only payments, which keeps payments low but does not pay the balance down. Without discipline, the balance can linger for years.

Second mortgage

A second mortgage is a separate loan registered behind your first mortgage. You keep your existing mortgage, its rate and its term untouched.

A second mortgage can make sense when your first mortgage has a large penalty and a long time left. A second mortgage can also help when your income or credit does not fit a bank's refinance rules. Second mortgages generally come from alternative or private lenders and cost more than a first mortgage. A second mortgage may carry lender and broker fees, disclosed in writing before you commit. Second mortgages tend to suit a short-term step with a plan to roll everything into one mortgage at renewal.

A quick way to compare the three options

1. If your term ends soon, a refinance at renewal usually avoids a penalty and is often the simplest.
2. If you need money over time and qualify, a HELOC from a bank, credit union or monoline lender offers flexibility.
3. If breaking your mortgage would be costly and you need a lump sum now, compare the penalty against the extra cost of a second mortgage for the months until renewal.

What to do next

To see how much HELOC room you might have, try the HELOC room tool; results are estimates only, not an offer or advice. Or use our call-me-back form and we will compare a refinance, a HELOC and a second mortgage for you.