Should You Refinance or Get a Second Mortgage to Pay Off Debt?

It depends on your interest rate, how much equity you have, and whether breaking your current mortgage will trigger a large penalty. Refinancing can work well if today’s rate is similar or lower than what you have now and the penalty to break is reasonable. A second mortgage may make more sense if your existing rate is very good, your penalty is high, or you only need to borrow for a short term.

A second mortgage often makes more sense if you have a low fixed rate on your current mortgage, a big prepayment penalty, or you need funds quickly and don’t fit traditional bank guidelines. In those cases, keeping your first mortgage as-is and adding a smaller second position for debt consolidation can sometimes cost less overall, even if the second mortgage rate is higher.

The main risk is that you’re moving unsecured debt onto your home. If you miss payments, you could eventually face legal action or even the forced sale of your property. There’s also a behaviour risk: if you pay off your credit cards but keep spending the same way, you can end up with both a larger mortgage and new credit card balances.

Most Canadian lenders want you to keep your total lending (first mortgage plus any second mortgage) at or below around 80% of your home’s current value, though private lenders can sometimes go higher. That means if your home is worth $800,000, many lenders will want your total mortgage and home-secured debt to stay at or under $640,000.