Mortgage Refinance Requirements in Ontario: Equity and Approval

You may want to pull money out of your home to consolidate debts, renovate or cover a major expense. Lenders will look at how much equity you have, whether your income supports the new payments, and your credit history.

This article sets out the equity limits that are usually used in Canada, the costs and risks of borrowing against your home, and the paperwork you can expect to gather. Income and credit tests differ by lender, so treat this as a starting point and confirm details with your lender, a licensed mortgage professional and a lawyer.

How much equity can you borrow against?

Equity is the part of your home's value that you own, meaning its value minus what you still owe on it. Lenders do not let you borrow against all of it. The Financial Consumer Agency of Canada (FCAC) describes typical maximums for borrowing against home equity.

For example, on a $250,000 home with a $150,000 mortgage, the most that can be borrowed in total at 80% is $200,000, leaving $50,000. Because FCAC does not use the word refinance, treat 80% as the usual cap it describes, not a rule for every lender or product.

Equity rules for a HELOC

A HELOC lets an owner borrow up to 65% of the home's value. A HELOC combined with a mortgage requires at least 20% equity, while a standalone HELOC requires more than 35% equity.

HELOC borrowers pay interest only on the amount borrowed, and paying only interest means the loan is never paid off. Most HELOCs have a variable rate based on the lender's prime rate plus a margin, so payments can rise. Lenders must notify the borrower in writing within 30 days of a rate change.

Income, credit and paperwork

Every lender has its own income and credit tests, and the details are not the same everywhere. In general, expect the lender to ask how you earn your income, how much debt you carry and how you have handled credit in the past. Your credit history matters: late or unpaid credit cards and loans stay on a credit report for up to 6 years, and judgments usually stay 6 years, or 7 years with TransUnion in Ontario.

For a HELOC at a bank, the borrower needs home equity and must pass a stress test. The lender may also require an appraisal, proof of ownership, mortgage details, and a lawyer or notary to register the home as collateral. Other products may ask for similar items, but ask your lender for its exact list.

• Recent mortgage statement showing your balance and terms.
• Proof of ownership of the home.
• Government photo ID.
• Proof of income, such as pay records, employment letters or tax documents, as your lender requires.
• A list of your debts and monthly payments.
• Details of any claims or liens registered against the property.
• The name of a lawyer or notary to register the new mortgage.

Costs and risks to weigh

Costs of borrowing against home equity include appraisal, title search, title insurance and legal fees. A new mortgage loan insurance premium may be needed, and the lender may have to change the original mortgage terms. Ask for a written list of every fee before you commit.

The main risk is that your home secures the loan. If the borrower cannot repay, the consequences can include foreclosure. A HELOC reduces your equity, and a HELOC must be repaid if the home is sold. If a mortgage with a power of sale clause goes into default, the lender may sell once the borrower has been in default for at least 15 days and at least 35 days' notice has been given to everyone with an interest in the property.

If you hold a mortgage with a lender who is currently in good standing, compare the interest cost over the whole term, not just the monthly payment.

What to do next

• Estimate your home's value and subtract your mortgage balance to see your likely room under the limits above.
• Decide how much you really need and what the money is for.
• Compare a second mortgage, a HELOC and other options on rate, fees and flexibility.
• If you use a broker, confirm their FSRA licence status first.
• Ask each lender for its income, credit and appraisal requirements in writing.
• Have a real estate lawyer review the commitment and closing documents before you sign.

Frequently asked questions