A cash-out refinance lets you tap into your home equity by replacing your current mortgage with a larger one and pocketing the difference. It is one of the most common ways Canadians access large sums of cash for renovations, debt consolidation, or investing. This guide covers how it works, what it costs, and when it makes sense compared to a HELOC.
How a cash-out refinance works
The process is straightforward:
- Your home is appraised to determine its current market value
- You apply for a new mortgage for up to 80% of the appraised value
- The new mortgage pays off your old mortgage balance
- You receive the difference as cash (minus fees and penalties)
Worked example
| Detail | Amount |
|---|---|
| Current home value (appraised) | $800,000 |
| Maximum refinance amount (80% LTV) | $640,000 |
| Remaining mortgage balance | $400,000 |
| Cash available | $240,000 |
| Less: prepayment penalty (estimated) | −$12,000 |
| Less: appraisal fee | −$400 |
| Less: legal fees | −$1,500 |
| Less: discharge fee | −$300 |
| Net cash received | $225,800 |
Your new mortgage is $640,000 at current rates. Your monthly payment increases because you are borrowing more, but you have $225,800 in cash to use.
Maximum loan-to-value: 80%
In Canada, cash-out refinances are capped at 80% loan-to-value (LTV). This means you must retain at least 20% equity in your home after the refinance.
| Home Value | Max Refinance (80% LTV) | Current Mortgage | Max Cash Out |
|---|---|---|---|
| $500,000 | $400,000 | $250,000 | $150,000 |
| $600,000 | $480,000 | $300,000 | $180,000 |
| $800,000 | $640,000 | $400,000 | $240,000 |
| $1,000,000 | $800,000 | $500,000 | $300,000 |
| $1,200,000 | $960,000 | $600,000 | $360,000 |
If you owe more than 80% of your home’s value, a cash-out refinance is not available.
Cash-out refinance vs HELOC
| Feature | Cash-Out Refinance | HELOC |
|---|---|---|
| Type | New mortgage (lump sum) | Revolving line of credit |
| Interest rate | Fixed or variable mortgage rate (lower) | Prime + 0.50% to prime + 1.00% (higher) |
| Access to funds | One-time lump sum | Draw as needed, repay, draw again |
| Repayment | Blended principal and interest payments | Interest-only minimum |
| Maximum LTV | 80% | 65% (standalone) or 80% combined with mortgage |
| Upfront costs | Penalty + appraisal + legal ($5K–$30K) | Appraisal + legal ($1,000–$2,500) |
| Best for | Large, one-time needs (renovations, debt payoff) | Ongoing access to funds, smaller draws |
| Rate lock | Yes (if fixed rate) | No (always variable) |
| Qualification | Full re-qualification required | Full qualification required |
Key difference: A cash-out refinance gives you a lower rate but costs more upfront and gives you all the money at once. A HELOC is more flexible and cheaper to set up, but the rate is higher and always variable.
Read our detailed comparison in HELOC vs refinance.
Requirements
To qualify for a cash-out refinance, you need:
| Requirement | Typical Minimum |
|---|---|
| Credit score | 620+ (680+ for best rates) |
| Home equity | At least 20% after refinance |
| Income documentation | T4s, pay stubs, NOA, or T1 Generals if self-employed |
| Stress test | Qualify at contract rate + 2% or 5.25%, whichever is higher |
| GDS ratio | 39% or less |
| TDS ratio | 44% or less |
| Property appraisal | Required (ordered by lender) |
Costs breakdown
| Cost | Typical Range | Notes |
|---|---|---|
| Prepayment penalty | $2,000–$25,000+ | Variable: 3 months interest. Fixed: greater of 3 months interest or IRD |
| Appraisal fee | $300–$500 | Some lenders waive this |
| Legal fees | $1,000–$2,000 | For new mortgage registration and discharge of old mortgage |
| Discharge fee | $200–$400 | Charged by your current lender to remove the old mortgage |
| Title insurance | $200–$400 | May be required |
| Total estimated cost | $3,700–$28,300 | Heavily depends on whether you are breaking a fixed or variable mortgage |
The prepayment penalty is by far the largest cost. If you are on a variable-rate mortgage, the penalty is typically just 3 months of interest — making a cash-out refinance much cheaper. Fixed-rate penalties can be steep, especially with Big 5 banks that use posted rates in their IRD calculations.
Use our mortgage penalty calculator to estimate your specific penalty.
When a cash-out refinance makes sense
Debt consolidation
If you are carrying high-interest debt — credit cards at 20%, a personal loan at 8%, a car loan at 7% — refinancing that debt into your mortgage at 4%–5% can save thousands per year. On $50,000 of credit card debt, moving from 20% to 4.5% saves approximately $7,750 in interest annually.
Caution: You are converting unsecured debt into debt secured by your home. If you cannot make payments, you risk losing your home. And if you run up credit card balances again after consolidating, you will be in a worse position than before.
Home renovations
Refinancing to fund renovations that increase your home’s value (kitchen, bathroom, additional suites) can be a sound investment. If a $100,000 renovation increases your home value by $80,000–$120,000, the borrowed funds effectively pay for themselves.
Investment (the Smith Manoeuvre)
The Smith Manoeuvre is a strategy where you refinance and invest the proceeds in income-producing assets. Because the borrowed funds are used for investment purposes, the interest becomes tax-deductible. Over time, investment returns and tax savings accelerate wealth building.
This is an advanced strategy. It requires discipline, a long time horizon, and comfort with market risk. The interest is only deductible if the CRA considers the investment purpose legitimate.
When a cash-out refinance does NOT make sense
Close to renewal
If your mortgage renews in 6–12 months, wait. At renewal, you can refinance without paying a prepayment penalty. The penalty for breaking early could cost tens of thousands of dollars that you would avoid by simply waiting.
The penalty wipes out the benefit
If the prepayment penalty is $20,000 and the interest savings from refinancing are only $15,000 over the remaining term, you lose money. Always calculate the break-even before proceeding.
Using cash for depreciating assets
Borrowing against your home to fund vacations, cars, or lifestyle spending is risky. You are extending your mortgage and paying interest for years on items that lose value immediately.
You cannot comfortably afford the higher payment
A larger mortgage means higher payments. If the new payment stretches your budget to the limit, a cash-out refinance could put you in financial trouble if rates rise at renewal or your income changes.
Tax implications
In Canada, mortgage interest on your principal residence is not tax-deductible. However, interest on borrowed money used for investment purposes is deductible.
If you do a cash-out refinance and:
- Use the cash for personal expenses (renovations, debt consolidation, spending) → Interest is not deductible
- Use the cash to invest in income-producing assets (stocks, rental property, business) → Interest on that portion may be deductible
Keep meticulous records separating the investment portion from personal use. The CRA requires a clear paper trail. Consult a tax professional before implementing this strategy.
The Bottom Line
A cash-out refinance is a powerful tool for accessing home equity, especially for debt consolidation, major renovations, or investment purposes. The biggest cost is the prepayment penalty, which is far lower on variable-rate mortgages. Before refinancing, calculate whether the benefits exceed all costs, check how close you are to renewal, and ensure you can comfortably afford the higher mortgage payment. If you need flexible, ongoing access to equity rather than a lump sum, a HELOC may be the better option.