Home Equity Line of Credit
The short version
A home equity line of credit is revolving credit secured against your home. You are approved for a limit, you draw from it as you need, and you pay interest only on the balance you actually use. Repay it and the room becomes available again. In Canada the revolving portion is capped at sixty five percent of the property value, and combined with a mortgage your total borrowing against the home can reach eighty percent. Minimum payments are interest only, which keeps them low and means the balance never shrinks unless you make it. The rate is variable and moves with prime. A HELOC suits people who need money in stages or unpredictably, and suits poorly anyone likely to treat it as income. Approvals are on approved credit.
How it actually works
Think of it as a credit card secured by your house, at a fraction of the interest. The lender registers a charge against the property and approves a limit. Nothing is owed until you draw.
Draw $40,000 for a renovation and you pay interest on $40,000. Pay $15,000 back and you pay interest on $25,000, with the $15,000 available again. There is no fixed term, no amortization schedule and no set end date, which is exactly what makes it useful and exactly what makes it easy to carry indefinitely.
How much you can get
Two ceilings apply and they are often confused.
- Sixty five percent of the property value is the maximum for the revolving line of credit portion on its own.
- Eighty percent of the property value is the maximum for everything registered against the home combined, mortgage and line of credit together.
On a home worth $900,000 with a $300,000 mortgage, total borrowing can reach $720,000, so up to $420,000 could be available as a line of credit. If you had no mortgage at all, the line alone would still cap at $585,000, which is the sixty five percent figure.
Readvanceable mortgages
Many lenders offer a combined product: a mortgage and a line of credit under one registration, where the credit limit grows automatically as you pay the mortgage down. Every principal payment converts into available credit.
For disciplined borrowers this is elegant, particularly investors who repeatedly draw for down payments and repay from sales or refinances. For everyone else it quietly removes the main benefit of paying down a mortgage, which is that the debt goes away. If the room reappearing is a temptation rather than a tool, a plain mortgage is the better product.
What it is genuinely good for
- Renovations paid in stages. You draw as the contractor invoices rather than borrowing the whole budget on day one and paying interest on money sitting in your account.
- Down payments on investment property. Draw for the purchase, repay after a refinance or sale, then redraw for the next one. Covered further on our investment property page.
- A standby buffer. Self-employed borrowers with uneven income often keep one open and rarely use it, which is a sound reason to have one.
- Consolidating debt where the amount is uncertain, though for a fixed balance a consolidation through a refinance or second mortgage usually costs less.
Where it goes wrong
Interest only payments hide the problem. A balance can sit unchanged for years while feeling affordable every month. The low payment is a feature that behaves like a trap.
The rate moves. HELOCs follow prime. A balance that was comfortable can become uncomfortable without you doing anything, and unlike a fixed mortgage there is no protected period.
The limit counts against you elsewhere. When you apply for other credit, lenders generally count the entire limit as though it were drawn. An unused line can reduce what you qualify for on your next purchase.
It is demand credit. The lender can reduce the limit or call the balance, typically if values fall or your circumstances change. Rare, but real, and a reason not to make it your only contingency plan.
It refills. Consolidating cards onto a line and then rebuilding the card balances leaves you worse off than when you started. This is the single most common way these end badly.
When something else fits better
- You need a fixed amount, once. A refinance gives it to you at mortgage pricing with a schedule that actually pays it off.
- You want to keep a low rate on your first mortgage. A second mortgage leaves it untouched.
- You would rather not have the temptation. Fixed term borrowing that amortizes is the more honest structure for most households, and there is no shame in choosing it.
Tell us what you need the money for and over what period, and we will tell you which of these is actually cheapest for your situation.
Common questions
How much can I get on a HELOC?
The revolving portion is capped at sixty five percent of your home value. Combined with a mortgage, total borrowing against the property can reach eighty percent. So on a $900,000 home you could have up to $585,000 as a line of credit, or a mortgage plus a line totalling $720,000.
Do I pay anything if I do not use it?
No interest, because interest is charged only on the balance you draw. There may be a small annual fee depending on the product. The real cost of an unused line is that lenders count the full limit as a liability when you apply for other credit.
What are the payments?
Interest only on what you have drawn, which keeps the minimum payment very low. That flexibility is the main attraction and also the main trap, because paying only interest means the balance never reduces.
Is the rate fixed?
No. HELOC rates are variable and move with prime, so your payment changes when the Bank of Canada moves. If you want certainty on a large balance, converting some of it to a fixed term portion or a mortgage is usually the better structure.
Can I get one if I am self-employed or my credit is imperfect?
HELOCs tend to be harder to qualify for than mortgages, because lenders are underwriting a limit you could draw at any time. If a line of credit is not available to you, a second mortgage often is, and it achieves much the same thing with a fixed structure.
Can the lender reduce or cancel it?
Yes. A HELOC is generally demand credit, meaning the lender can reduce the limit or call the balance, typically if property values fall sharply or your circumstances change. It is uncommon but it is written into the agreement, and it is a reason not to rely on one as your only safety net.