Commercial Mortgage Refinancing vs. a Second Mortgage: Which Fits Your Business?

Define what each proposal replaces

Two proposals can both promise $150,000 for business debt consolidation while changing very different obligations. A full refinance may replace the first mortgage and fund the selected payouts. A second mortgage may leave the first mortgage untouched and finance only the additional amount. Write down exactly which debts disappear under each option before comparing the advertised rates.

BDC describes commercial mortgages as property-secured financing used for purposes including refinancing. Actual structures and eligibility vary. Ask the lender to identify the borrower, property security, guarantees, term and amortization for the proposal in front of you. Do not assume that a product description establishes the conditions of your own transaction. ^[1]

Keep the existing mortgage inside the comparison

For the second-mortgage option, include every scheduled payment on the retained first mortgage. For the refinance option, include the payout charge for ending that mortgage and all costs of the replacement. If fees are financed, include them in the starting debt balance. If paid in cash, include them in the closing cash requirement. Count each expense once.

Next choose a common review date, such as 24 months. Record payments through that date and debt still outstanding under each structure. A smaller payment may reflect slower principal repayment. If one loan matures before the review date, do not assume it renews automatically or at today’s terms. Identify the repayment or renewal dependency explicitly and compare the available information honestly.

Worked example: the lower payment leaves more debt

Consider two fictional proposals funding the same starting $290,000 of property-supported debt. Option A is a full refinance with $5,000 paid upfront, 24 monthly payments of $2,500 and $265,000 remaining at month 24. Option B combines a retained first mortgage and a second loan: $3,000 upfront, combined monthly payments of $2,700 and $257,000 remaining at month 24. These are invented schedule figures, not rate quotes.

A requires $65,000 cash over the period and leaves $265,000 owing. B requires $67,800 and leaves $257,000 owing. A therefore uses $2,800 less cash but leaves $8,000 more debt. Under these assumptions, nominal financing cost is $40,000 for A and $34,800 for B, calculated as payments plus upfront costs plus ending debt minus starting debt. A’s lower payment alone does not make it cheaper.

Choose an acceptable trade-off

This simplified comparison assumes no redraws, extra advances, taxes, discounting or exit charges at month 24. Ending balances are tracked, not paid off in the cash-flow totals. Obtain real lender schedules before deciding. If you intend to sell or repay at the review date, add the relevant settlement costs. Where cash flows differ substantially in timing, ask an adviser to compare present values too.

The best fit may preserve cash during a difficult season, reduce total cost or avoid an unsuitable maturity. Name the objective before choosing. Ask whether the current lender can offer an increase or revised terms, then compare that proposal on the same basis. Use the cost guide for the calculation and the cash-flow guide to test whether either option remains manageable when sales slow.

United States comparison: FDIC examination guidance flags renewals and refinancings without credible repayment support. That reinforces the need to explain the maturity plan rather than assume another refinance will be available. This is U.S. supervisory context, not a Canadian product requirement. ^[2]

Your practical worksheet

Complete this using actual records. The fields are for printing and handwriting; they do not transmit your information.

Open the printable worksheet

Frequently asked questions

Should I compare only the rate on the additional $150,000?

No. Include retained mortgage costs, any repricing of the first balance, fees and ending debt across the complete structure.

Is preserving a low first-mortgage rate always best?

No. Compare the benefit with the second loan’s cost, fees, maturity and repayment requirements.