What is a HELOC and how does it work?

A home equity line of credit (HELOC) lets you use your home as collateral for a revolving line of credit. You can use the funds to pay for big expenses or consolidate debt, but you run the risk of losing your home if you can’t keep up with repayments.

In this guide, we’ll explain how HELOCs work, how much they cost, and their pros and cons.

How does a home equity line of credit work?

Home equity is the difference between the value of your home and how much you owe on your mortgage. A HELOC is a revolving line of credit secured by your home equity.

It works a lot like a credit card – you can withdraw funds up to your pre-approved credit limit, and you’ll only pay interest on the amount you actually borrow. Any amount you repay toward the principal then goes back into your credit line, which means you can borrow that money again whenever you need it.

If you choose, you only have to make a minimum payment that covers interest each month (though it’s advisable to make larger payments wherever possible). However, because your property acts as collateral for the line of credit, if you fall behind on payments, your lender can repossess or sell your home to recoup their losses.

What can I use a HELOC for?

You can use the money in a home equity line of credit for any legitimate purpose, such as:

• Taking a vacation
• Renovating your home
• Paying bills
• Buying a new car
• Consolidating debt

How much can I borrow with a HELOC?

There are two key HELOC limits that determine how much cash you can access:

• You can only borrow up to 65% of your home’s value. You can borrow up to 65% of the market value of your home with a home equity line of credit. This means if your home is worth $500,000, you can access up to $325,000 in financing.
• Your mortgage plus your HELOC must be less than 80% of your home’s value. Any outstanding mortgage you owe plus your HELOC can’t equal more than 80% of your home’s value. If you still owe 80% or more on your mortgage, you won’t be able to take out a HELOC.

Calculating how much you can borrow

Here’s how to figure out how much you can borrow with a HELOC:

• Multiply the market value of your home by 0.8 (0.8 represents the maximum amount of 80%).
• Subtract the balance of your mortgage.
• The figure you get is the amount you’d be able to borrow through a HELOC — as long as that amount does not exceed 65% of the value of your home.

Types of home equity lines of credit in Canada

There are two main types of home equity lines of credit in Canada:

• HELOC tied to your mortgage. A HELOC is typically combined with your mortgage, which usually means you can borrow up to 80% of the value of your home. This means you’ll need to hold your mortgage and HELOC with the same lender. As you pay down your mortgage, the equity in your home increases, which means you can access a larger HELOC limit.
• Standalone HELOC. This type of HELOC is not linked in any way to your mortgage. You can only borrow up to 65% of the value of your home.

HELOC rates

Home equity line of credit rates in Canada are usually higher than mortgage interest rates and lower than unsecured personal loan rates. The interest on a HELOC is charged daily and is a variable interest rate that’s tied to the lender’s prime rate. The prime rate changes based on the Bank of Canada’s overnight rate.

The amount of interest you pay will depend on how much of your home equity line of credit you actually use. For example, if you have a HELOC with a $50,000 line of credit but you only spend $30,000 of your balance, then you’ll only pay interest on the $30,000 you spend.

How much does a HELOC cost?

You’ll need to consider the interest rate and fees when calculating the cost of borrowing.

• What interest rates can I expect with a HELOC?
  The interest rate on a HELOC is variable, so it fluctuates in line with the Bank of Canada’s overnight rate. As of April 2024, home equity line of credit rates range from approximately 7.10% to 8.20%.
• How can I minimize the interest I pay?
  The most obvious way to cut down on your home equity line of credit rates is to only use the funds that you absolutely need. This is because interest is only calculated on the money you withdraw. To save even more money, you should try to make regular payments that are large enough to make a dent in both the interest and principal balance you owe.
• When can I make repayments?
  Your interest payment will usually be automatically withdrawn from your bank account each month. It’s up to you to pay more toward the principal balance if you can.

HELOC fees

You’ll pay the following fees when you get a home equity line of credit:

• Appraisal fees. You’ll typically pay between $200 and $500 to have your home’s value professionally appraised.
• Title search fee. This can cost anywhere from $250 to $500.
• Legal fees. You’ll need to pay a lawyer to register paperwork showing you are using your home equity as collateral for your line of credit. Fees start at around $500.
• Administration fees. Some lenders charge administration or origination fees to open the HELOC.
• Closing fees. These fees sit anywhere between $200 to $350 and are charged to close your HELOC once you no longer need it.
• Inactivity fees. If you don’t use your HELOC, you may also be charged inactivity fees which can vary by provider.

Pros and cons of HELOCs

Pros

• Tap into your home equity. A HELOC lets you use the equity you’ve built up in your home to access a large credit limit.
• Flexible access to funds. You can withdraw money whenever you need it as long as you haven’t reached your available credit limit.
• Pay for large purchases. You can use the cash from a home equity line of credit however you like.
• Competitive rates. HELOC interest rates are lower than those offered with an unsecured line of credit or personal loan.
• Bad credit doesn’t matter. You’ll typically still be able to qualify for a loan if you have bad credit as long as you own your own home.
• Prepayment allowed. You can make interest-only payments if that suits your budget, or you can make extra HELOC repayments without penalty.

Cons

• Interest-only payments. While interest-only payments can be a good feature, you may struggle with your debt if you don’t focus on paying down your principal.
• Risk losing your property. If you can’t pay back your HELOC, you risk facing foreclosure of your home.
• Additional fees. You’ll pay additional fees to get your home equity line of credit set up, especially if you need to get the value of your home appraised.
• Interest rate increases. Since interest rates are variable, your home equity line of credit rate will go up if the prime rate increases.
• Overspending. Just because you can access a line of credit doesn’t always mean you should use it. You’ll need to be careful to use the funds for important expenses only.
• Difficult to switch lenders. If you want to switch to a new mortgage lender, you may need to repay your HELOC in full before you can do so.

How to apply for a home equity line of credit

To apply for a HELOC, you’ll need to meet the following criteria:

• Be at least 18 years of age
• Be a Canadian citizen or a permanent resident
• Have a mortgage worth less than 80% of the appraised value of your home

To apply, compare a variety of home equity line of credit rates in Canada. Once you’ve found the right lender, apply online. You’ll need to provide your personal details, proof of income and employment, your most recent mortgage statement and details of your home.

The lender will check your credit score and assess your ability to repay what you borrow, and they will get your home professionally appraised to determine its market value.

Tips for managing a HELOC

Since the equity in your home is used as collateral, there’s a lot to think about when considering a HELOC. Here are some tips to keep in mind:

• Minimize the amount of interest payable on your HELOC by making payments toward the principal balance.
• Don’t withdraw more funds than you need.
• Compare a range of lenders to ensure you’re getting a competitive rate.
• Set money aside for a few months’ worth of interest payments in case you experience financial difficulties.

Bottom line

A home equity line of credit is a revolving line of credit that lets you secure financing using the equity in your home. This type of lending product typically comes with lower interest rates than personal loans and lines of credit, and you may even be able to qualify with bad credit. Just be aware that if you fail to make your repayments on time, your lender can repossess the property you used as collateral to pay off your debt.

Compare home equity line of credit rates to find financing that suits your needs.

Frequently asked questions

• How can I get the best home equity line of credit rates?

  The simplest way to find the best HELOC rates is to compare a range of lenders to check what rates they offer. You can also qualify for a better rate by improving your credit score and reducing your debt-to-income ratio.

• Can I increase my HELOC amount?

  You may be able to simply request an increase with your financial provider. Some providers will require you to go through the approval process again while others may assess your repayments, credit score and home equity to make a decision on your creditworthiness.

• What is the maximum amount I can borrow with a HELOC in Canada?

  You can use a HELOC to borrow up to 65% of the value of your home. If your HELOC is tied to a mortgage, the combined value of your HELOC and your mortgage must be less than 80% of your home's value.

• What is home equity?

  Home equity is the difference between the value of your home and how much you owe on your mortgage. For example, if your home is worth $500,000 and you owe $200,000 on your mortgage, you have $300,000 equity in your home.

• Do you have to pay back a HELOC?

  Yes, you must repay the principal amount you borrow as well as any interest. While interest-only payments are allowed, you will still have to pay back what you borrow eventually. If you don't, you risk losing your home.

• How long do I have to withdraw money from a HELOC?

  This depends on your lender. The money in your HELOC is available to you during what is known as the draw period, which is typically anywhere from 3 to 10 years. You can opt to make interest-only payments during this period if you wish, or make principal-and-interest payments to pay down your debt. At the end of the draw period, you will no longer be able to withdraw any funds as you enter the repayment period.

• How do I withdraw from my HELOC?

  Supported withdrawal methods vary between lenders. You may be able to access funds via online or mobile banking, debit card, cheque or in-branch cash withdrawal.

• Is a HELOC different to a home equity loan?

  Yes. While a HELOC and a home equity loan both allow you to borrow against the equity in your home, a HELOC provides access to a revolving line of credit. A home equity loan is an installment loan that provides a lump sum you need to repay over time.