Cash Out Refinance in Canada: What You Need to Know

What is a Cash-Out Refinance?

A cash-out refinance is a type of mortgage refinance in which you refinance your existing mortgage loan with a new loan for a larger amount. The difference between the new loan amount and your existing mortgage balance is then disbursed to you in cash. The extra cash is yours to use for things like home improvements, investing, or paying down high-interest debt.

How Does a Cash-Out Refinance Work?

A cash-out refinance works by replacing your current mortgage with a new one. Your new mortgage amount can be as high as 80% of the value of your home. The difference in amounts between your current mortgage balance and your new mortgage amount will be yours in cash, deposited into your bank account.

Cash Out Refinance Step-by-Step Process

Refinancing is much easier than the process of getting your mortgage originally.

Step 1: Fill out our online application or give us a call. Once we have your information and goals, we will let you know what your options are.

Step 2: After we have collected all the documents from you, we will submit your application to your chosen lender and order an appraisal if needed. Your new mortgage could fund in as little as 3 weeks.

Step 3: Your new lender will transfer the new mortgage funds to your lawyer (or closing company) on the closing day, who will allocate the appropriate amount to your current mortgage lender to pay off your existing mortgage and deposit the remaining amount into your bank account.

Example of a Cash-Out Refinance

Here is an example of a cash-out refinance to illustrate how it works:

Let's say you have a mortgage loan with a balance of $200,000 and an interest rate of 4%. Your monthly mortgage payment is $954.83. After several years of making regular payments, you've built up equity in your home. You decide to take advantage of this equity by refinancing your mortgage with a cash-out refinance.

You apply for a new mortgage loan of $250,000 at an interest rate of 3.5%. The lender disburses the difference of $50,000 to you in cash at closing. Your new monthly mortgage payment is now $1,146.29.

In this example, you were able to tap into the equity you had built up in your home to get a cash payment at closing.

What are the benefits of a cash-out refinance in Canada?

There are several benefits to doing a cash-out refinance in Canada. One of the main benefits is that you can access the equity in your home without having to sell it. Usually, you can only get the money from the equity in your home by selling it and getting the money from the sale. But sometimes selling is not the best option, especially if you don't have another place to live.

Another benefit of a cash-out refinance is that it can have a lower interest rate than other types of loans. Since it is tied to your mortgage, a cash-out refinance usually has a lower interest rate, which can save you money in the long run.

A cash-out refinance is also structured like a mortgage, which means you get the benefits of a mortgage, like smaller monthly payments and a larger loan amount compared to other types of loans.

Disadvantages of a cash-out refinance in Canada

There are some disadvantages to doing a cash-out refinance. One of the main drawbacks is that it involves getting a new mortgage, which means you may have to pay off your mortgage over a longer period of time or with higher monthly payments. It's important to find a balance between the amount of money you can afford to pay each month and the length of time you want to pay back the loan.

Another drawback is that the more money you borrow in a mortgage, the more you will have to pay in interest over time. And if you borrow more money than your previous mortgage, you need to make sure you can afford the new repayment schedule. There may also be costs associated with a cash-out refinance, like a prepayment penalty, mortgage discharge fee, registration fee, home appraisal costs, and legal fees.

It is important to note that if the money you receive from a cash-out refinance is used intelligently, the benefits can outweigh the disadvantages.

When Does a Cash-Out Refinance Make Sense?

There are a few reasons why people might choose to do a cash-out refinance. A cash-out refinance is when someone takes out a new mortgage that is bigger than their old one and gets some cash back. Here are some reasons why people might do this:

1. To pay off other debts: Sometimes people use the cash from a cash-out refinance to pay off debts with higher interest rates, like credit card debt or personal loans. This can help them save money on interest and only have one lender to pay instead of many.
2. To make home improvements: Some people use the cash from a cash-out refinance to make improvements to their home. This can be a good investment because it can increase the value of the home and give them more equity.
3. To pay for education: Some people use the cash from a cash-out refinance to pay for tuition or to learn new skills.
4. To start or fund a business: A cash-out refinance can be a good way to get money to start or fund a business. The interest rate on a mortgage is usually lower than on other types of loans, so it can be a cheaper option.
5. To invest in other things: Some people use the cash from a cash-out refinance to make other investments, like putting a down payment on a second property. 

Cash-Out Refinancing Alternatives

There are other ways to borrow money using the equity in your home besides a cash-out refinance. Here are some options:

1. Home equity loan: This is like a cash-out refinance, but you don't have to break your current mortgage. You can borrow up to 80% of the value of your home after subtracting your existing mortgage balance. The interest rate may be higher than with a cash-out refinance.
2. Home equity line of credit (HELOC): With a HELOC, you can borrow up to 80% of the value of your home after subtracting your existing mortgage balance. You only pay interest on the amount you borrow and it is a flexible, low-interest way to access cash. The interest rate may be higher than with a cash-out refinance.
3. Reverse mortgage: With a reverse mortgage, you receive payments instead of paying your lender. The interest and principal must be paid back when the property is sold or when the homeowner moves or passes away. Reverse mortgages are only available in Canada for people over 55 years old.