·
Should You Refinance or Get a Second Mortgage to Pay Off Debt?
Debt Consolidation | Private Mortgage | Ontario
Canadians are carrying more debt than ever—credit cards, high-interest loans, lines of credit, car payments, and HELOCs that are nearly maxed out.
When monthly payments start to feel unmanageable, two options rise to the top:
- Refinance your existing mortgage
- Get a second mortgage (often through a private lender)
Both options can free up cashflow and dramatically reduce stress. But the best solution depends on your credit, equity, income, and future plans. Below is a clear breakdown so you can choose the right path.
What Is a Mortgage Refinance?
A refinance means replacing your current mortgage with a new one—usually at a higher amount so you can roll your other debts into it.
Best for:
- Strong or decent credit
- Steady provable income
- Lots of equity
- Wanting the lowest possible rate
Pros:
- Lowest cost of borrowing
- One single monthly payment
- Can drastically increase monthly cashflow
Cons:
- You must qualify under lender rules
- You may face penalties if you break your current mortgage
- Takes longer to approve than private financing
Example:
A homeowner with $620,000 mortgage, good credit, and $80,000 in credit card debt can refinance into a new $700,000 mortgage—wiping out high-interest payments and replacing them with one predictable monthly payment.
What Is a Second Mortgage?
A second mortgage is an additional loan registered behind your first mortgage. In Ontario, these are often private mortgages that rely primarily on the equity in your home—not your income or credit score.
Best for:
- Bad credit
- Self-employed income
- Need funding fast
- Limited documentation
- Mortgage penalties make refinancing too expensive
Pros:
- Fast approvals (24–48 hours)
- Flexible income verification
- No need to touch your existing mortgage
- Ideal for urgent debt consolidation
Cons:
- Higher rates
- Usually interest-only payments
- Short-term solution (1–2 years)
Example:
A homeowner with bruised credit and maxed-out cards can borrow a $75,000 private second mortgage to pay off debt and raise credit scores—then refinance later at better terms.
How to Decide: Refinance vs. Second Mortgage
Choose a Refinance If:
- Your credit score is 680+
- You have stable T4 income or 3+ years of solid business financials statements with high net income
- Breaking your current mortgage won’t cost more than the benefits
- You want the lowest rate available
Choose a Second Mortgage If:
- Your credit is below 620
- You are self-employed and write off expenses
- You need approval within days, not weeks
- Your first mortgage penalty is too large to break
- Your debt has to be paid off immediately
Which Option Saves You More Money?
Here is a simplified Ontario example:
Current Situation:
- Credit card debt: $55,000 at 19%
- Line of Credit: $20,000 at 10%
- Car loan: $14,000 at 8%
- Monthly payments: ~$2,250 / month
- Mortgage: $640,000 at 2.59% (3 years left)
Option A: Refinance
- New mortgage: $720,000 at 5.49%
- New monthly payment: ~$4,075
- BUT all other payments disappear
- Net cashflow improvement: +$450 to +$700/month
Option B: Private Second Mortgage
- Second mortgage: $90,000 at 10–12% interest-only
- Payment: $750–$900/month
- All high-interest debt eliminated
- Net cashflow improvement: +$1,200–$1,500/month
Private second mortgages often win on cashflow—but refinancing wins long-term on cost.
The right choice depends on your credit, timing, penalties, and equity.
Final Recommendation
If you’re unsure whether to refinance or get a second mortgage, think in two steps:
- Solve the immediate cashflow problem
- Plan a refinance later if needed
The goal isn’t just paying off debt—it’s protecting your home, repairing credit, and reducing stress.
Want a Debt Consolidation Strategy?
You can use our free calculators: