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Cash-Out Refinance in Canada: How It Works

Updated

A cash-out refinance replaces your mortgage with a larger one and pays you the difference. It is one way to borrow against your home equity, alongside a home equity line of credit (HELOC) and a home equity loan. This page covers how much you can take out, how lenders qualify you, the costs, and how it compares with a HELOC. It is part of the refinancing and home equity hub; the step-by-step process is in how to refinance your mortgage.

How a cash-out refinance works

  1. The lender appraises your home to set its value.
  2. You apply for a new mortgage for more than you owe, within the lender’s limit.
  3. The new mortgage pays off the old one, including any prepayment penalty if you break it before the term ends.
  4. You receive the rest, after legal and other costs.

How much you can take out

Under the Bank Act, a bank's loan to buy, renovate or improve a home, or a refinance of such a loan, together with any mortgage ranking equal to or ahead of it, can't exceed 80% of the home's value. Everything secured by the home counts toward that limit, including a HELOC or second mortgage.

Example: a home appraised at $800,000 with $400,000 owed. The penalty and fees below are illustrative; ask your lender for your own penalty and each fee.

ItemAmount
Appraised value$800,000
Most a bank can lend on a refinance (80%)$640,000
Current mortgage balance−$400,000
Available before costs$240,000
Prepayment penalty quoted by the lender (illustrative)−$12,000
Appraisal, legal and discharge costs (illustrative)−$2,200
Cash received$225,800

The new mortgage is $640,000, so the payment rises. At 4.50% over 25 years, for example, the payment on $640,000 would be about $3,542 a month, compared with about $2,214 on $400,000 at the same rate and amortization.

The same limit at other home values, for a home owing half its value:

Appraised valueMost a bank can lend on a refinanceOwedAvailable before costs
$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

If you already owe more than the limit, a conventional cash-out refinance isn’t available. Mortgage insurance can't lift an ordinary refinance above that limit: under the federal mortgage insurance rules, an insured high-ratio loan has to be for buying the home or for paying off an earlier uninsured low-ratio loan. The one insured refinance is for adding secondary suites: since January 15, 2025, a home you or a close relative live in can be refinanced with mortgage insurance up to 90% of its as-improved value to build additional units, up to 4 units in total, and the extra money can only pay for the construction, with no equity taken out. The home equity calculator shows how to estimate your own equity.

Qualifying

A cash-out refinance is a new mortgage, so the lender reviews your income, debts, credit and the home’s value again.

  • Stress test: Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones. A refinance is stress-tested like a new mortgage: since November 21, 2024, OSFI exempts a stand-alone uninsured mortgage from the test only when it moves at renewal from one federally regulated lender to another with no increase in the remaining amortization and no increase in the loan amount beyond $3,000 for the costs of the move (a straight switch).
  • Debt service: For an insured mortgage, CMHC caps your housing costs at 39% of gross income (GDS) and your housing costs plus other debt payments at 44% (TDS); lenders set their own limits for uninsured mortgages. A cash-out refinance is uninsured, so the lender’s own limits apply.
  • Credit and documents: FCAC notes that “each lender sets their own lending guidelines and policies”. The document list is in the refinance checklist.

What it costs

CostNotesSource
Prepayment penaltyOnly if you break a closed mortgage before the term ends; set by your contractFCAC
Administration and reinvestment feesAsk your current lenderFCAC
AppraisalConfirms the value the limit is measured againstFCAC
Discharge feeWhere a province doesn’t regulate it, typically no charge up to $400FCAC
Legal, title search and title insuranceListed by FCAC for borrowing against home equityFCAC

Breaking a closed mortgage, paying it off early or prepaying more than your privileges allow usually costs the higher of 3 months' interest and the interest rate differential (IRD) on a fixed rate, and typically 3 months' interest on a variable rate; your mortgage contract sets the exact method and comparison rate, and a federally regulated lender must tell you how it calculates the penalty. How mortgage penalties are calculated explains the methods and the mortgage penalty calculator estimates yours. At the end of your term there is no prepayment penalty, so a refinance timed for renewal avoids it.

Cash-out refinance vs HELOC

FeatureCash-out refinanceHELOC
What you getOne lump sumA credit limit you draw on, repay and draw again
Your current mortgageReplaced (broken, if before the term ends)Stays in place
RateA mortgage rate, fixed or variableFCAC: variable, changing as market rates move
LimitUnder the Bank Act, a bank's loan to buy, renovate or improve a home, or a refinance of such a loan, together with any mortgage ranking equal to or ahead of it, can't exceed 80% of the home's value.The revolving (non-amortizing) HELOC part can't exceed 65% of the home's value at a federally regulated lender.
PaymentsPrincipal and interest over the amortizationSet by the HELOC agreement; ask whether interest-only payments are allowed
Up-front costsPenalty (if mid-term) plus appraisal, legal and dischargeAppraisal, title and legal fees (FCAC)

HELOC vs refinance compares the two in detail, and mortgage vs home equity loan vs HELOC adds the home equity loan.

What people use it for

Paying off other debt

Moving credit card or loan balances into the mortgage lowers the rate but secures the debt on your home and stretches it over the amortization. FCAC warns that “you may face serious consequences, like the foreclosure of your home, if you can’t pay back the money you borrow”. Debt consolidation using home equity works through an example and the alternatives.

Renovations

A lump sum suits a project with a known budget. Whether a renovation adds as much value as it costs depends on the project and your market; the home renovation loan guide compares the ways to pay for one.

Investing

Interest is deductible when the borrowed money is used to earn income from a business or property, such as rent, interest or dividends, whatever secures the loan; it follows the money's current use, which you must be able to trace, and it isn't deductible on money used personally, on money borrowed for an RRSP, TFSA or FHSA contribution, or on an investment that can only produce capital gains. Keeping the invested money separate from personal spending makes the use traceable. Borrowing to invest also magnifies losses as well as gains, and the loan is secured by your home. The Smith Manoeuvre guide and using home equity to invest cover the strategy and its risks.

When a cash-out refinance may not pay

SituationWhy
Your term ends soonWaiting for maturity avoids the prepayment penalty
The penalty and fees are large next to what you needA HELOC or home equity loan can leave the mortgage in place
The money is for spending, not a project or debt payoffYou pay mortgage interest for years on something that doesn’t last
The higher payment would strain your budgetPayments rise with the larger balance, and rates can change at renewal

Sources

The figures and rules on this page come from these sources, last checked against them between September 25, 2026 and October 2, 2026. How we check facts.