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All You Need To Know About Getting A Home Equity Loan

Find the best HELOC rate in Canada

Sean Cooper

By Sean Cooper

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Thinking of tapping into your home’s equity for some extra funds? Whether it’s for renovations, an emergency fund or covering other big expenses, a Home Equity Line of Credit (HELOC) can be a flexible option. In this guide, we’ll go over everything you need to know about HELOCs in Canada — from understanding how they work, to tips on finding the best rates.

What is a HELOC and how does it work?

A HELOC lets you borrow against the equity you have in your home. It’s different from a typical loan because you don’t get all the money upfront. Instead, you have a revolving line of credit, meaning you can withdraw money as needed, up to a certain limit. 

Home equity is the portion of your home’s value that isn’t encumbered by a mortgage. For example, if you purchased a home for $450,000, and you had a 20% down payment of $90,000, then you’d need a mortgage for the remaining value of the home, or $360,000. Your equity in your home is the difference between the value of the home and the mortgage, or in this case, $90,000.

Here’s a deep dive into how HELOCs function and who might benefit the most:

  • Flexible borrowing: Imagine a HELOC as a giant credit card linked to your home’s value. You get access to a set amount of money, which you can use, pay back and borrow again. This flexibility is great for people who want access to funds over time.
  • Credit limit: The amount you can borrow depends on your home’s value and how much equity you’ve built up. In Canada, most lenders will allow you to borrow up to 65% of your home’s appraised value, minus any mortgage balance. So, if your home is worth $500,000 and you still owe $200,000 on your mortgage, you might have access to $125,000 through a HELOC.
  • Draw and repayment periods: With a HELOC, you can take out money as you need it and only make interest payments on what you’ve borrowed. You have the option of paying back both the principal and interest, but you’re under no obligation. However, if you miss your payments, that’s when your lender might ask you to repay your HELOC in full.

Who’s it best for? HELOCs work well for people who need ongoing access to funds and want flexibility in repayment. They’re often used for home renovations, education expenses, or even as a backup emergency fund. But since they’re secured by your home, they’re generally best for people with a stable income and a strong plan to manage repayments.

Compare the best HELOC rates with Homewise

What to consider before getting a home equity line of credit (HELOC)

A HELOC can be a great tool, but it’s essential to weigh the pros and cons carefully:

1. Interest rates: HELOCs typically come with variable interest rates that fluctuate based on the prime rate, meaning your payments can go up or down over time. Keep this in mind if you’re looking for stable monthly payments.

2. Purpose of the HELOC: Think about why you need the HELOC. If it’s for a one-time, fixed cost, like a renovation or a large purchase, a HELOC may be a good fit. But if you need a steady source of funds, other financial options might suit your needs better.

3. Risk of overborrowing: Since a HELOC gives you ongoing access to funds, it can be tempting to dip into it frequently. Remember, every dollar borrowed increases your debt load, and mismanaging your HELOC could put your home at risk.

4. Fees and conditions: Some lenders charge fees for setting up and managing a HELOC. Be sure to read the fine print so you know what to expect in terms of costs and conditions.

5. Exit plan: Since you’re borrowing against your home, it’s wise to have a plan for repaying your HELOC, especially if you plan to sell or refinance your home later.

HELOCs vs. home equity loans

While both HELOCs and home equity loans let you access your home’s value, they have some key differences. Let's get into it!

Loan type

  • HELOC: Acts like a revolving line of credit, allowing you to borrow as needed.
  • Home equity loan: Provides a lump sum amount, similar to a traditional loan.

Repayment structure

  • HELOC: Often interest-only payments during the draw period.
  • Home equity loan: Fixed monthly payments covering both principal and interest.

Interest rates

  • HELOC: Usually variable, so rates can fluctuate.
  • Home equity loan: Typically fixed, which means stable payments over time.

Flexibility

  • HELOC: Flexible, allowing you to borrow repeatedly up to your limit.
  • Home equity loan: Fixed amount borrowed all at once with no additional borrowing.

Best for

  • HELOC: Ideal for ongoing expenses like home renovations or emergencies.
  • Home equity loan: Suitable for one-time expenses, such as debt consolidation or a large purchase. 

Learn more about the differences between HELOCs, home equity loans and refinancing.

Benefits of having a HELOC in Canada

There are some big perks to having a HELOC:

  • Flexible access to funds: You only borrow what you need, when you need it.
  • Interest savings: Interest rates on HELOCs are generally lower than those on personal loans or credit cards since they’re secured by your home.
  • Pay for what you use: Interest is only charged on the amount you actually borrow, not the entire credit line.
  • Easy to repay and re-borrow: As you pay down what you’ve borrowed, you free up more funds to borrow again if needed.
  • Emergency backup: A HELOC can serve as an emergency fund, allowing you to access money if unexpected costs arise.

The bottom line

A HELOC can be a powerful tool for homeowners needing flexible funds, but it requires thoughtful planning and careful budgeting to make the most of its benefits without overextending financially. The next step? Find a lender offering competitive rates, compare the options, and decide if a HELOC aligns with your financial goals and needs.

Sean Cooper Freelance Contributor

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail and Financial Post.

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