A home equity line of credit, or HELOC, is a revolving credit facility secured by the equity in your home. It lets you borrow up to an approved limit, repay what you have drawn, and borrow again, much like a credit card, but with your home as collateral and generally at a lower interest rate than unsecured credit. Because the debt is secured, the lender holds a legal claim against your property if you fail to repay.
That last point deserves more attention than any product feature. A HELOC can be a flexible way to access a large sum, but it puts your home at risk. The Financial Consumer Agency of Canada (FCAC) advises that you may have to repay the full amount you owe at any time, without notice. Before you sign, you need to understand how the limit is set, how interest is charged, and what happens if your circumstances change.
How a HELOC works
A HELOC is a revolving facility. You are given a credit limit, and you can draw on it, repay, and draw again as long as the facility remains open. That is different from a mortgage, which advances a lump sum and is paid down over a set amortization period.
In Canada, a HELOC is usually registered as a second charge behind the first mortgage, or as a first charge if the home is owned outright. Some lenders offer a readvanceable mortgage, which combines a term mortgage with a HELOC and increases the available HELOC room as you pay down the mortgage principal.
Interest is charged only on the amount you owe, not on the full limit. If you draw $20,000 for a renovation and later repay $5,000, you pay interest on $15,000. That is one reason a HELOC suits large, irregular expenses such as renovations or tuition.
How the credit limit is set
The starting point is your home equity: the appraised value of the property minus the balances of any mortgages or other charges registered against it. A lender then applies its own underwriting policy. Federally regulated lenders follow OSFI's Guideline B-20, which sets expectations for income verification, debt service ratios, and combined loan-to-value limits when a HELOC is combined with mortgage debt. The exact amount a lender will make available depends on the property, your finances, and the lender's risk appetite.
Because the limit is tied to property value and lender policy, it is not permanent. If the home's value falls significantly, or if the lender changes its underwriting standards, the lender may reduce or cancel the undrawn portion of the limit, and may demand repayment of the outstanding balance. That possibility is written into most HELOC agreements and is a main difference between a HELOC and a fixed-term mortgage.
A HELOC is a credit agreement, and credit agreements are subject to an outer legal limit on cost. Under the Criminal Code, the effective annual rate of interest on a credit agreement cannot exceed 35% APR. The Criminal Interest Rate Regulations, in force since 1 January 2025, set out how that ceiling is calculated.
Interest and repayment
Most HELOCs in Canada carry a variable interest rate, usually tied to the lender's prime rate. When prime moves, the interest cost on your balance moves too, typically within a month. A smaller number of lenders offer fixed-rate portions or a convertible feature that lets you lock in a rate on part of the balance for a set term. The standard product is variable.
Interest is normally calculated daily on the outstanding balance and charged monthly. Many HELOC contracts allow interest-only payments during the draw period. That keeps the monthly payment low, but the balance does not fall unless you make principal payments yourself. Other lenders require a minimum principal payment, often expressed as a small percentage of the outstanding balance. In every case, the full amount is repayable on demand.
That combination, interest-only payments plus demand repayment, can catch borrowers off guard. A HELOC can feel open-ended for years, then become a large balance that must be refinanced or repaid quickly when the lender demands it or the home is sold.
How a HELOC compares with other borrowing options
The table sets out the main structural differences. It does not compare specific rates, because rates depend on the lender, the borrower, and market conditions at the time of application.
| Borrowing option | Secured by your home? | Revolving? | How payments usually work | Main risk |
|---|---|---|---|---|
| Home equity line of credit | Yes | Yes | Often interest-only; principal repayable on demand | Loss of home if you default; limit or rate can change |
| Second mortgage | Yes | No | Principal and interest over a set term | Loss of home if you default |
| Unsecured line of credit | No | Yes | Interest plus a required principal portion | Higher cost than secured debt |
| Credit card cash advance | No | Yes, up to the card limit | Minimum payment based on the balance | High interest cost |
| Personal instalment loan | Sometimes | No | Fixed payments over a set term | Rate depends on credit history and whether the loan is secured |
A mortgage refinance is another alternative. It replaces your existing first mortgage with a larger one, which may offer a lower rate and a fixed amortization schedule. A HELOC leaves the first mortgage in place and adds a second charge. The better choice depends on how much you need, how long you need it, and whether you want the flexibility to reborrow.
The risks to your home
A HELOC is secured debt. If you cannot repay, the lender can take legal action to enforce its charge, which can ultimately lead to the sale of your home. Because the facility is usually repayable on demand, a demand can be triggered by a missed payment, a drop in property value, or a change in the lender's policy. If you cannot repay on demand, you may be forced to sell the property or refinance under pressure.
Other risks follow from the structure. A variable rate means your interest cost can rise when prime rises. Interest-only payments mean the balance can stay flat or grow if you continue to draw on the facility. Using a HELOC to consolidate credit card debt converts unsecured debt into secured debt: the rate may be lower, but the consequence of default is more severe. If you keep using the cards after consolidating, you can end up with both the HELOC balance and the card balances.
Over-borrowing against your home is another risk. If property values fall, a large HELOC balance can leave you with little equity or negative equity. That does not change the amount you owe, but it can limit your options if you need to sell or refinance.
Questions to ask before you apply
- Is this a demand facility? Can the lender require repayment in full without notice?
- Is the interest rate fixed or variable, and what index does it follow?
- What is the minimum monthly payment, and does it cover any principal?
- Can the lender reduce or cancel the undrawn limit? Under what circumstances?
- What fees apply, including appraisal, legal, discharge, and any annual or renewal fees?
- What is the combined loan-to-value of the first mortgage and the HELOC?
- What happens to the HELOC if I sell the home or refinance?
- Are there prepayment penalties or fees for early repayment?
Federally regulated lenders must provide a credit agreement that sets out the key terms, and FCAC publishes consumer guidance on comparing credit products. Read the agreement in full and ask for the total cost of borrowing in writing.
Sources and further reading
- Financial Consumer Agency of Canada: Home equity lines of credit
- Office of the Superintendent of Financial Institutions: Guideline B-20, Residential Mortgage Underwriting Practices and Procedures
- Criminal Code, section 347: Criminal rate of interest
- Criminal Interest Rate Regulations, SOR/2024-114
This article is general information, not financial, legal, or tax advice. Instalment.ca is a loan matching and comparison service, not a lender.