It’s a common dilemma for homeowners in Ontario. You have a fantastic, low-rate first mortgage that you’re happy with, but life has changed. You need to access a significant amount of cash—perhaps $50,000 or more—to fund a major home renovation, consolidate high-interest debts, or make a new investment.

You find yourself at a critical financial crossroad with two primary options:

Break your entire mortgage contract, pay a potentially massive prepayment penalty, and start fresh with a new, larger loan that includes the cash you need.

Keep your great first mortgage untouched and add a new second mortgage on top of it, which will have a higher interest rate.

Which path is cheaper? Which is smarter? The answer is not always obvious, and it requires a careful analysis of the numbers. This guide will walk you through the detailed financial calculation a mortgage broker performs to answer this exact question, helping you make a decision based on math, not emotion.

Option A: Breaking & Refinancing

The first option is the most straightforward in terms of the final product. It involves a complete reset of your mortgage financing.

How It Works

When you break and refinance, you are completely discarding your old mortgage contract. You go through a full mortgage application to get a new, single, larger loan. This new mortgage is used to pay off your old mortgage balance in full, and the remaining funds are the tax-free cash you need. You are left with one simple mortgage payment.

The Major Pro: One "Clean" Payment & Best Rates

The primary advantage of this approach is its simplicity. You have one single mortgage payment to manage, which is clean and easy to budget for. Furthermore, because you are starting a brand new mortgage, you get access to the entire Canadian mortgage market. As brokers, we can shop your application to dozens of lenders to find you the absolute best interest rate and terms available for your new, larger loan amount.

The Major Con: The Prepayment Penalty

The critical downside to this strategy is the prepayment penalty. If you have a fixed-rate mortgage, this penalty is often calculated using the Interest Rate Differential (IRD). The IRD is designed to compensate your lender for the interest they will lose over the remainder of your term.

For example, if you have a low fixed rate of 2.99% from a few years ago and current rates are around 5.0%, the IRD penalty can be enormous—often amounting to tens of thousands of dollars. This single, massive upfront cost can make breaking an otherwise great mortgage a very expensive proposition.

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Option B: Keeping Your Mortgage & Adding a Second

The second option is a more surgical approach. It's designed to access the cash you need while preserving your excellent first mortgage.

How It Works

With this strategy, your fantastic first mortgage remains completely untouched. You continue to make your regular payments at your great low rate. To get the extra cash, we arrange a new, separate loan—a second mortgage or a HELOC—for the exact amount you need. This new loan is registered on your property's title in second position, right behind your primary mortgage.

The Major Pro: Avoiding the Penalty

The number one reason to choose this option is to completely avoid paying the large prepayment penalty on your first mortgage. If your IRD penalty is calculated to be $14,000, choosing a second mortgage means you keep that $14,000 in your pocket. For many homeowners, this upfront saving is the most important factor.

The Major Con: The Higher Interest Rate

There is no free lunch in the mortgage world. The interest rate on the second mortgage will be significantly higher than the rate on your first mortgage. This is because the second mortgage is in a riskier lien position for the lender (they are second in line to get paid if you default).

Introducing the "Blended Rate" Calculation

To fairly assess the cost of this option, you shouldn't focus on the high second mortgage rate in isolation. The smart way to look at it is to calculate your total "blended" or "effective" interest rate across both loans. This gives you a true picture of the weighted average interest rate you are paying on your total home debt.

The Broker's Analysis: A Head-to-Head Case Study

Let's put these two options to the test with a real-world scenario.

The Scenario

A family in Ontario needs $100,000 in cash for a major home renovation.

Their Current Mortgage: $500,000 remaining on their first mortgage at a fantastic 2.99% fixed rate, with 2 years (24 months) left on the term.

The Prepayment Penalty: After calling their bank, they confirm their IRD penalty to break the mortgage today would be a painful $14,000.

Running the Numbers for Both Options

Option A: Break & Refinance

New Mortgage Amount: $500,000 (to pay off old mortgage) + $100,000 (cash out) = $600,000.

New Interest Rate: We shop the market and find a new 5-year fixed rate of 5.0%.

The Cost over 2 Years: We calculate the total interest they will pay on this new mortgage over the next 24 months. This comes out to approximately $58,500.

Total Cost: We add the upfront penalty: $58,500 (Interest) + $14,000 (Penalty) = $72,500.

Option B: Add a Second Mortgage

First Mortgage: They keep their $500,000 mortgage at 2.99%.

New Second Mortgage: We arrange a $100,000 second mortgage at a rate of 9.5%.

The Cost over 2 Years: We calculate the interest paid on both loans separately over the next 24 months.

Interest on 1st Mortgage: ~$30,000

Interest on 2nd Mortgage: ~$19,000

Total Cost: $30,000 + $19,000 = $49,000.

The Verdict

The math is clear.

Cost of Breaking & Refinancing: ~$72,500

Cost of Adding a Second: ~$49,000

In this very common scenario, Option B is the clear winner, saving the family approximately $23,500 over the next two years. The higher interest rate on the smaller second mortgage is far less expensive than paying the massive penalty to refinance the entire loan at a higher rate.

Getting a Second Mortgage

The decision to break your mortgage or add a second is a complex one with no single right answer for everyone. It is a purely mathematical question that depends on your current rate, the size of your penalty, and the rates available on the market today.

Don't guess which option is cheaper. An emotional decision could cost you tens of thousands of dollars. The only way to know for sure is to do the math.

If you need to access your home's equity, contact our brokerage today. We will run a personalized cost analysis, comparing all your options side-by-side. We’ll show you the most effective and least expensive way to access your home's equity and achieve your financial goals.

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