Engineering a methanol tolerant lipase is of great importance in biodiesel production. Here, the first semi-rational method for directed enzyme evolution to enhance methanol tolerance by targeting high B-factor residues for iterative saturation mutagenesis (ISM) is reported. The best double mutant, TLL-S105C/D27R, retained 71% of its original activity after incubation in methanol, showing 30% greater methanol tolerance than TLL. TLL-S105C/D27R also displayed 27% higher activity over TLL. Structure modelling suggested that the increased stability of TLL-S105C/D27R was caused by the formation of a new hydrogen bond which stabilized the protein structure. E. coli (TLL-S105C/D27R)-catalyzed biotransformation of waste grease produced biodiesel in 81% yield in 8h, showing improvement over the 67% yield for E. coli (TLL), while retaining 92% productivity after 4 cycles of biotransformation of waste grease. The engineered TLL mutant shows high potential for commercial biodiesel production.