A home equity line of credit, usually called a HELOC, lets you borrow against the value of your home up to a set limit, and you pay interest only on what you draw. A home equity loan is different: you borrow a fixed amount and repay it in set instalments. Both use your home as collateral, which is why they usually carry lower rates than unsecured borrowing. The trade-off is serious. If you cannot repay, the lender can take steps against your home.
How a HELOC Works
The lender registers a charge against your property and sets a limit based on your equity, which is the difference between your home value and what you still owe on the mortgage. You can draw, repay, and draw again, much like a credit card but secured by your home. Interest is usually variable, so your cost moves when rates move. Some lenders structure a HELOC as a readvanceable product combined with your mortgage.
How a Home Equity Loan Works
A home equity loan is a second mortgage in many cases. You receive a lump sum and repay it over a fixed term at a fixed or variable rate. Because the payment is fixed, budgeting is easier than with a line of credit. It suits a one-time expense such as a renovation or a debt consolidation, while a HELOC suits ongoing or unpredictable needs.
| Feature | HELOC | Home equity loan |
|---|---|---|
| Structure | Revolving limit | Fixed lump sum |
| Payment | Interest on the balance drawn | Fixed instalments |
| Rate | Usually variable | Fixed or variable |
| Best for | Ongoing or flexible needs | One-time planned expense |
How Much You Can Borrow
Lenders typically cap total borrowing against a home at a percentage of its appraised value, often around 65% to 80% for a HELOC when combined with the mortgage, though the exact limit depends on the lender and your financial profile. Your income, credit score, and existing debt all affect the number. A federally regulated lender must also assess whether you can afford the payments if rates rise, because the balance is secured against your home.
The Risks You Must Weigh
- Your home is on the line. Default can lead to the loss of your home, unlike an unsecured loan.
- Variable rates can rise. A HELOC payment grows when rates climb.
- It is easy to over-borrow. A large available limit invites spending you would not otherwise do.
- Consolidation can backfire. Converting unsecured card debt into secured debt reduces your flexibility if your income drops.
- Fees add up. Appraisal, legal, and discharge fees apply.
Should You Use Home Equity to Consolidate Debt?
It can make sense if the rate is much lower and you have a firm plan to repay. It can also turn manageable unsecured debt into a risk to your home. The test is simple: could you keep making the payment if your income fell by a third? If not, secured borrowing is the wrong tool. Also remember that after consolidation you must stop using the cards you paid off, or you will rebuild the debt on top of the new loan.
Before You Apply
- Get your home appraised so you know your real equity.
- Compare a HELOC with a home equity loan and with an unsecured loan.
- Ask whether the rate is fixed or variable and how it is set.
- Confirm all fees, including discharge fees.
- Check whether the lender is federally regulated or provincially licensed.
Read the terms closely. A low rate is not a benefit if the structure encourages borrowing you cannot repay.
Closing or Reducing a HELOC
A HELOC stays open until you close it or the lender discharges the charge on your property. If you no longer need it, ask the lender to close the account and remove the registration, because an open secured limit can affect how other lenders assess your borrowing capacity. Some lenders charge a discharge fee, and a lawyer or notary may be needed to remove the charge from title. Do not simply stop using it. An unused but open HELOC still counts against you when you apply for other credit.
Sources and further reading
- Office of the Superintendent of Financial Institutions, which sets expectations for how federally regulated lenders underwrite residential secured lending.
- Bank of Canada, which publishes information on interest rates that affect variable-rate borrowing.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.