Cash-Out Refinance in Canada: How It Works, What It Costs, and When It Makes Sense

You have built equity in your home. Maybe the market has been kind to you, maybe you have been paying your mortgage down for years, or maybe both. Either way, that equity is sitting there, and you need capital for something. A cash-out refinance is one common way to access it.

But a cash-out refinance is not free. There are real costs involved, and depending on your situation, a HELOC or second mortgage might actually save you more money. This guide covers how cash-out refinancing works in Canada, what it costs, and how to decide whether it is the right move for you.

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger mortgage. The difference between the new mortgage and your old balance is given to you as cash at closing, deposited directly into your bank account by the lawyer handling the transaction.

Here is a simple example. Your home is worth $700,000. You owe $350,000 on your current mortgage. You refinance to a new mortgage of $500,000. After paying off the old mortgage, you receive $150,000 in cash (minus closing costs).

The key thing to understand: this is not "free money." You are borrowing against your home. Your monthly payment depends on the new balance, rate and amortization, your amortization may reset, and your home secures the entire amount. The upside is that mortgage rates are usually lower than credit card rates, personal loan rates, or most other forms of borrowing.

How It Works in Canada

Canadian mortgage rules differ from the U.S. in some important ways that affect cash-out refinancing. Here are the rules that matter.

Maximum Loan-to-Value: 80%

For an uninsured refinance from a federally regulated bank, the maximum loan-to-value (LTV) ratio is generally 80%.^[1] Section 418 of the federal Bank Act sets this limit for uninsured bank loans on residential property, including refinancing of a purchase or renovation loan. The excess can be allowed only where repayment is insured or guaranteed. In practice, that means you keep at least 20% equity in your home after the refinance. Trust companies, private lenders and other lenders follow their own rules, and lender policies may be stricter.

CMHC does not insure ordinary cash-out refinances, such as ones for debt consolidation.^[3] CMHC has one refinance program for building a secondary suite. That program has its own purpose and eligibility rules, and it does not allow equity to be taken out, so it is not a general cash-out option.

The Process, Step by Step

1. Application and pre-approval. Your broker submits your income, credit, and property details to lenders. This determines how much you can borrow and at what rate.
2. Appraisal. The lender orders an independent appraisal of your property. Your maximum borrowing amount is based on the appraised value, not your estimate or the municipal assessment.
3. Approval and commitment. The lender issues a formal commitment letter outlining the rate, term, conditions, and any fees.
4. Legal closing. A real estate lawyer discharges your old mortgage, registers the new one, and handles the fund disbursement. The cash-out portion is deposited to your account, typically on closing day.

Timelines vary by lender, property and lawyer. Ask your broker for an estimate for your file before you set a closing date.

The Stress Test Still Applies

Even though you already own the property, the federal stress test applies to a refinance. You must qualify at the greater of your contract rate plus 2%, or the OSFI floor rate, which is 5.25% as of 2026-10-05.^[2] This means your actual borrowing capacity may be lower than the 80% LTV cap suggests, depending on your income and existing debts.

Costs and Penalties: Examples

The biggest cost of a cash-out refinance is usually the prepayment penalty on your existing mortgage. If you are mid-term on a fixed rate, this can be substantial. If you are on a variable rate or near renewal, it may be minimal.

Prepayment Penalty Types

Variable-rate mortgages: The penalty is often three months of interest, so check your own contract. As an example only, $400,000 at 4.50% gives three months of interest of $4,500.

Fixed-rate mortgages: The penalty is the greater of three months of interest or the Interest Rate Differential (IRD). The IRD is the difference between your contract rate and the lender's current rate for the remaining term, multiplied by your balance and remaining time. This can be much more than three months of interest.

Cost Example: Breaking a Fixed-Rate Mortgage

Note: this table is a simplified illustration, not a lender's calculation. Every lender calculates IRD differently. Some use posted rates, some use discount rates, and the method can change the penalty a lot. Ask your lender for the exact penalty in writing before you commit to a refinance.

Other Closing Costs

Add the prepayment penalty to these costs. The penalty is usually the largest item when breaking a fixed-rate mortgage mid-term, so it is the figure to check first.

Cash-Out Refinance vs. HELOC vs. Second Mortgage

A cash-out refinance is not the only way to access your equity. Here is how the three main options compare.

The decision often comes down to timing. If your mortgage is up for renewal within the next few months, a cash-out refinance usually adds little cost, because there is normally no prepayment penalty. If you are three years into a five-year fixed term, a second mortgage or HELOC may cost less overall, because it does not break your first mortgage. That depends on the rates, fees and penalty in your case.

Common Uses for Cash-Out Equity

Debt Consolidation

This is one of the most common reasons people refinance. Example only: if you carry $50,000 of credit card debt at 20% interest and roll it into a mortgage at an assumed 4.5%, the interest difference is about $7,750 a year before costs, if the balance stayed the same. That is not a saving over a whole term. Rolling unsecured debt into a mortgage also means the debt is now secured against your home. Penalties, fees and principal repayment all change the result, so compare full mortgage schedules before deciding. See our debt consolidation refinancing guide.

Home Renovations

Renovations can add value, but the return varies and is not guaranteed. Whether a project is a sound use of refinance proceeds depends on its cost, the local market and how long you stay. A basement apartment may produce rental income, but whether that covers the higher mortgage payment depends on the rent, the costs and the rules that apply to the unit.

Investment Property Down Payment

Some homeowners refinance their primary residence to fund a down payment on a rental property. This is a legitimate strategy, but it increases your risk. You are leveraging one property to buy another. If rental income does not cover costs or the market drops, you have more debt on both properties. This is not a beginner move.

Business Investment

Self-employed borrowers sometimes refinance to inject capital into their business. Interest may be deductible if the borrowed money is used to earn income, and the CRA looks at how borrowed funds are actually used.^[4] Talk to your accountant before you borrow for this purpose.

Qualification Requirements

Lenders often scrutinize a cash-out refinance more closely than a purchase mortgage, because the money goes to you rather than to a home purchase.

What Lenders Look At

• Credit score: Minimum scores are set by each lender and vary. Files with more equity and stronger income may be accepted at lower scores than others. Ask lenders directly.
• Income verification: Lenders usually ask for proof of income, such as T4s, a Notice of Assessment or pay stubs. Self-employed borrowers often provide tax returns, and requirements vary by lender.
• Debt service ratios: Lenders test the share of your income going to housing costs (GDS) and to all debts (TDS), at the stress-test rate. Limits vary by lender, so ask before you apply.
• Property type and condition: Standard residential properties are usually the simplest to finance. Rural properties, properties over a certain acreage, or those in poor condition may face restrictions or require specific lenders.

When Conventional Lenders Say No

If you cannot qualify with an A-lender, alternative (B) lenders and private lenders may be options. They generally charge higher rates and fees than A-lenders, and they generally put more weight on the equity in your property than on credit score or income. Ask for the rate and fees in writing. For private lender rates, see our Ontario private mortgage rate guide.

When It Makes Sense (and When It Doesn't)

A Cash-Out Refinance Is a Good Fit When:

• Your mortgage is at or near renewal, so you pay no (or minimal) penalty.
• You need a large lump sum for a specific purpose.
• Your current mortgage rate is higher than the rate you could get on a new mortgage today, so a new mortgage may lower your rate.
• You want one simple monthly payment instead of managing multiple debts.
• You plan to stay in the home for at least the full new mortgage term.

Consider Alternatives When:

• You are well into a fixed-rate term with a low rate. The penalty will eat into your savings significantly.
• You only need a small amount. The setup costs of a full refinance may not be justified.
• You need flexible, ongoing access to funds. A HELOC is better suited to draws over time.
• You plan to sell the home within 1 to 2 years. A shorter-term second mortgage may cost less overall.

The Renewal Sweet Spot

Renewal is often the lowest-cost time to do a cash-out refinance, because there is usually no prepayment penalty. You can compare lenders, although there are still costs such as legal and appraisal fees. Some lenders let you start the process before your renewal date, so ask yours how early that is. If your renewal is 6 to 12 months away and the need is not urgent, waiting may be worth considering.