Loan-to-Value Ratio at Refinancing: 80% Maximum and Exceptions

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The Loan-to-Value Ratio in Mortgage Refinancing

The loan-to-value (LTV) ratio represents the proportion between your total mortgage amount and your property's appraised value. In Canada, OSFI's Guideline B-20 imposes an 80% ceiling for refinancing conducted through federally regulated financial institutions. This rule has been in effect since 2012 and is one of the pillars of Canadian prudential mortgage regulation.

Loan-to-Value Ratio (LTV): The ratio between the total mortgage loan amount and the appraised market value of the property, expressed as a percentage. For example, a $400,000 loan on a property appraised at $500,000 yields an 80% LTV. For refinancing, the maximum LTV is 80% as per OSFI guidelines.

Calculating the LTV for Refinancing

The LTV calculation for refinancing is more complex than it may first appear. The lender must account for several elements in the numerator: the current mortgage balance, the desired additional amount (cash-out), the break penalty if added to the loan rather than paid in cash, and sometimes capitalized refinancing fees. In the denominator, the value appraised by the OEAQ chartered appraiser serves as the reference, not the original purchase price or municipal assessment.

Concrete Calculation Example

Consider a property appraised at $600,000 with a current mortgage balance of $320,000. The owner wants to withdraw $100,000 in equity for renovations and will need to pay an $8,000 break penalty that they wish to add to the loan. The new balance would be $320,000 + $100,000 + $8,000 = $428,000. The LTV would be 428,000 / 600,000 = 71.3%. This refinancing complies with the 80% limit. The maximum borrowable amount would be $600,000 x 80% = $480,000, leaving an additional margin of $52,000 if needed.

Exceptions and Alternatives Beyond 80%

The 80% limit applies to federally regulated financial institutions under OSFI. Private lenders and certain alternative lenders in Quebec, which operate under the AMF's provincial regulation, are not necessarily subject to this same constraint. They can offer refinancing at higher ratios, generally up to 85% or 90%, but with considerably higher interest rates and additional lender fees.

Category A lender (banks, credit unions): maximum 80% LTV, best rates, stress test mandatory.
Category B lender (alternative): up to 85% LTV possible, rates 1% to 3% higher, lender fees of 1% to 2% of the amount.
Private lender: up to 85-90% LTV, rates of 7% to 15%, fees of 2% to 5%, temporary solution only.
Second mortgage: allows combining two loans for a total LTV of 85% to 90%, rates vary by lender position.

The OSFI stress test also applies to refinancing. The borrower must qualify at the higher of their contractual rate plus 2% or the qualifying rate floor published by the Bank of Canada. This qualification can limit the borrowable amount even if the LTV is below 80%. The AMF-certified mortgage broker analyzes both constraints simultaneously to déterminé the maximum achievable amount for your refinancing.

Frequently Asked Questions

Why is refinancing limited to 80% of the property value?

The 80% limit is imposed by OSFI's Guideline B-20 for federally regulated financial institutions. It aims to protect the financial system by ensuring borrowers maintain a sufficient equity cushion. Mortgage insurers (CMHC, Sagen, Canada Guaranty) do not provide coverage for refinancing, unlike purchases where they insure up to 95% LTV.

How is the loan-to-value ratio calculated for refinancing?

The LTV is calculated as follows: (total new mortgage balance / appraised property value) x 100. The new balance includes the current balance, the additional amount requested, any break penalty added to the loan, and sometimes capitalized refinancing fees. The appraised value comes from the professional appraisal ordered by the lender.

Can you refinance above 80% with an alternative lender?

Yes, some alternative or private lenders in Quebec offer refinancing up to 85% or even 90% LTV. However, rates are significantly higher (often 2% to 5% above conventional lenders) and additional lender fees apply. These solutions are generally temporary, while waiting to requalify with a conventional lender.

Can a second mortgage bypass the 80% limit?

Technically, a second mortgage combined with the first can exceed 80% total LTV. The second-position lender accepts higher risk and charges a higher rate. Combined LTVs can reach 85% to 90% depending on the second-position lender. Caution: the total cost of this strategy must be carefully analyzed with your AMF-certified broker.

Is the break penalty included in the LTV calculation?

Yes, if the penalty is added to the new mortgage balance rather than paid in cash, it increases the LTV. For example, on a property appraised at $500,000 with a $350,000 balance and a $10,000 penalty added to the loan, the LTV would be (360,000/500,000) x 100 = 72%. This leaves room under the 80% ceiling.

Does the OSFI stress test apply to refinancing?

Yes, the Guideline B-20 stress test applies to refinancing. The borrower must qualify at the higher of the contractual rate plus 2% or the qualifying rate floor published by the Bank of Canada. This test affects the maximum eligible amount, regardless of the loan-to-value ratio.