Mortgage Blog

Everything You Need to Know About Cash-Out Refinance in Canada

August 12, 2025 | Posted by: Sarabjit Dhuna

Introduction

For Canadian homeowners, home equity is more than just a number on a statement—it's a powerful financial tool. One of the most common ways to tap into that equity is through a cash-out refinance. Whether you're looking to consolidate debt, renovate your home, invest in a business, or fund your child’s education, cash-out refinancing can offer access to funds at a relatively low interest rate.

This article explores what cash-out refinancing is, how it works in Canada, its pros and cons, eligibility requirements, and alternatives to consider.

What Is a Cash-Out Refinance?

A cash-out refinance involves replacing your existing mortgage with a new, larger one—and receiving the difference between the two amounts in cash. It’s a way of turning your home equity into liquid funds.

Example:

• Current mortgage: $300,000

• Home value: $600,000

• You refinance for: $480,000 (80% of home value)

• You receive: $180,000 in cash (minus closing costs and remaining mortgage balance)

How Does Cash-Out Refinancing Work in Canada?

In Canada, refinancing is regulated by rules set by lenders and overseen by financial institutions such as the Office of the Superintendent of Financial Institutions (OSFI). Here’s how the process typically works:

Step-by-Step:

1. Determine Your Equity: Your lender will appraise your home to calculate its current market value.

2. Apply for a New Mortgage: You must qualify based on income, credit score, and debt ratios.

3. New Mortgage is Approved: If approved, your old mortgage is paid off and replaced with a new one.

4. Get Your Cash: The difference between the new loan and the amount needed to pay off your existing mortgage is given to you in cash.

Maximum Loan-to-Value (LTV) Ratio

In Canada, you can borrow up to 80% of your home’s appraised value through refinancing.

Formula:
$\text{Maximum loan amount} = 0.80 \times \text{Home Value}$

This means if your home is worth $600,000, the maximum you could borrow is $480,000.

Eligibility Requirements

To qualify for a cash-out refinance in Canada, lenders typically look at:

• Credit score: Generally 600 or higher; 680+ preferred

• Income: Proof of stable employment or self-employment income

• Debt service ratios: Your total debt payments shouldn’t exceed 44% of your gross income

• Equity: You must have at least 20% equity remaining in your home post-refinance

• Appraisal: A formal home appraisal is usually required

Pros of Cash-Out Refinancing

• ✅ Access to Large Amounts of Money: Ideal for major expenses like home renovations or investing.

• ✅ Lower Interest Rates: Mortgage rates are usually lower than personal loans or credit cards.

• ✅ Consolidate High-Interest Debt: Pay off credit cards or loans with cheaper mortgage money.

• ✅ Improve Cash Flow: By stretching repayment over a longer period.

Cons of Cash-Out Refinancing

• ❌ Closing Costs: Includes legal fees, appraisal fees, and possible penalties for breaking your current mortgage.

• ❌ Higher Debt: You increase your overall mortgage debt.

• ❌ Risk of Foreclosure: Failing to repay could put your home at risk.

• ❌ Not Available to Everyone: Stringent qualification criteria may block access.

Common Uses for Cash-Out Refinance

• Home renovations or repairs

• Investing in rental property or other investments

• Paying off high-interest debt

• Education expenses

• Funding a business

Tax Implications in Canada

Unlike in the U.S., mortgage interest is not tax-deductible in Canada for personal residences. However, if the funds from your refinance are used for investment purposes (e.g., buying a rental property or investing in stocks), the interest on that portion may be tax-deductible. Consult a tax professional for clarity.

Alternatives to Cash-Out Refinancing

If you don’t want to break your mortgage or don't qualify for a refinance, consider:

1. Home Equity Line of Credit (HELOC)

• Flexible credit line

• Interest-only payments

• You only pay for what you use

2. Second Mortgage

• Another loan on top of your first mortgage

• Higher interest than a primary mortgage, but no need to break your original loan

3. Reverse Mortgage (for seniors 55+)

• Tap into equity without monthly payments

• Loan is repaid when home is sold or estate is settled

Cash-Out Refinance vs. HELOC: Quick Comparison

Is It Right for You?

Cash-out refinancing can be a smart financial strategy if used wisely. It makes the most sense if:

• You're using the funds for productive purposes (e.g., home upgrades or investments)

• You're getting a lower mortgage rate than your current one

• You can comfortably manage the new monthly payments

However, it's not ideal for frivolous spending or if your job or income is uncertain.

Final Thoughts

Cash-out refinancing in Canada is a powerful financial tool—but like any loan, it comes with risks. Ensure you understand your financial position, shop around for the best rates, and speak to a Sarabjit - Principal Broker to decide if it’s the right move.

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