HELOC vs Second Mortgage vs Refinance: Which Is Right for You?

Three ways to use the equity you've built

If you've owned your home for a while, you've likely built up equity. Maybe you want to renovate, add a basement suite, pay off high-interest debt, cover a business cash-flow gap or put a down payment on an investment property.

There are three main ways to access that equity: a home equity line of credit (HELOC), a second mortgage or a refinance. Each one works differently, costs differently and fits different situations.

I'm Theeban Pathmanathan, a Mortgage Agent Level 2 with FIN Mortgage – Dominion Lending Centres, and I help homeowners in Toronto, Scarborough, Markham and Durham Region compare these options side by side. Here's a plain-English breakdown.

How a HELOC works

A HELOC is a revolving line of credit secured by your home. You borrow what you need, when you need it, and pay interest only on what you use. As you pay it down, the room becomes available again.

HELOC limits

Under OSFI's B-20 guideline, federally regulated lenders cap the revolving HELOC portion at 65% of your home's value, and your total borrowing against the home (mortgage plus HELOC) at 80%.

What to know

• HELOC rates are usually variable, so your cost can change as rates move.
• You'll need to qualify under the stress test, at the greater of your contract rate plus 2% or 5.25%.
• For most HELOCs from prime lenders with qualified borrowers, there's no fee to you for my service.

Best for: borrowers with good credit and provable income who want flexible access to funds, such as for a renovation done in stages.

How a second mortgage works

A second mortgage is a separate loan registered behind your first mortgage. You receive a lump sum and repay it on a set schedule, usually over a shorter term. Your first mortgage stays exactly as it is.

What to know

• Second mortgages are often available from alternative and private lenders, who may be more flexible on credit and income.
• Rates and fees are higher than a first mortgage, because the lender is in second position.
• Any fees are disclosed in writing up front.
• It's important to have a plan to pay it off or roll it into your first mortgage at renewal.

Best for: homeowners who need a lump sum quickly, want to keep a low first-mortgage rate, want to avoid a large penalty, or don't qualify for a HELOC.

How a refinance works

A refinance replaces your current mortgage with a new, larger one, and you receive the difference (minus costs) in cash. You can learn more on my refinance page.

The 80% limit

With a prime lender, you can borrow up to 80% of your home's appraised value, minus what you currently owe. For example, on a home appraised at $900,000, the maximum total mortgage would be $720,000. If you owe $450,000, you could potentially access up to $270,000 before costs.

What to know

• Refinances are not insured, so you'll qualify under the stress test at the greater of your contract rate plus 2% or 5.25%.
• If you break your mortgage before the end of your term, you'll usually pay a prepayment penalty. This is often the biggest cost, so we'd get the exact figure from your lender.
• You may also have appraisal costs, legal fees for the new mortgage registration and a possible discharge fee from your current lender.
• For most residential refinances with qualified borrowers, there's no fee to you for my service.

Best for: homeowners near renewal, with a small penalty, or who want one simple payment and a lower overall rate on all their borrowing.

Side-by-side comparison

Which one fits your situation?

Choose a HELOC if...

You have good credit and provable income, you want flexibility, and you'll draw funds over time. A staged renovation or a basement suite is a classic example.

Choose a second mortgage if...

You have a great rate on your first mortgage you don't want to lose, your penalty to break it is high, or your credit or income doesn't fit a HELOC right now. It can also help with short-term needs like catching up on property taxes or CRA debt. If your situation needs a more equity-focused lender, my private mortgages page explains how that works.

Choose a refinance if...

Your renewal is close or your penalty is small, and you'd like to roll everything into one payment. If debt consolidation lowers your monthly payments, we can also look at using your prepayment privileges to pay down your mortgage faster.

Sometimes the answer is a mix

The cheapest option depends on your penalty, the rate you'd give up, how much you need and for how long. Sometimes a full refinance comes out ahead; sometimes a HELOC or second is clearly better. That's why I compare all three with real numbers.

Questions to ask before you borrow

• How much do I actually need, and for how long?
• What will my total monthly payments be?
• What are the fees, and is there a penalty to pay it off early?
• If the rate is variable, can I handle it if rates rise?
• How will this affect my renewal in a few years?

Borrowing against your home is a serious decision. I'll make sure you understand the costs, risks and repayment plan before you commit. You can read more on my second mortgage and HELOC page.

Frequently asked questions

What's the difference between a HELOC and a second mortgage?

A HELOC is a revolving line you draw from as needed. A second mortgage is a lump-sum loan repaid on a set schedule.

How much can I borrow with a HELOC?

With federally regulated lenders, the HELOC portion is capped at 65% of your home's value, and total borrowing (mortgage plus HELOC) at 80%.

Will I pay a penalty to refinance?

If you break your mortgage before the end of your term, usually yes. I'll get the exact penalty from your lender before you decide.

Can I get a second mortgage if I'm self-employed?

Yes. Alternative and private lenders offering second mortgages may be more flexible on how income is shown. We'd usually start with your T1 Generals and Notices of Assessment.

Let's compare your options

Not sure which route makes sense for you? Book a free call with me, and I'll lay out a HELOC, a second mortgage and a refinance side by side so you can choose with confidence.