HELOC Explained: How a Home Equity Line of Credit Works in Canada
A home equity line of credit (HELOC) lets you borrow against your home whenever you need to, pay interest only on what you use, and borrow again as you repay. It's one of the cheapest ways to borrow in Canada — and one of the easiest to misuse. Here's how the limits, rates and payments work, with a worked example.
Key takeaways
- A HELOC is a revolving line of credit secured by your home, usually priced at prime plus a margin.
- The revolving portion can't exceed 65% of your home's value, and your mortgage plus HELOC together can't exceed 80%.
- Most HELOCs only require interest payments, which keeps the payment low but never pays the debt down on its own.
- To qualify, you'll need to pass the stress test and have at least 20% equity in your home.
What a home equity line of credit is
A HELOC works like a credit card secured by your house. You're approved for a limit, you draw what you need, and you can repay and re-borrow without reapplying. You only pay interest on the balance you're using — an unused HELOC usually costs nothing.
HELOCs come in two forms:
- Combined with a mortgage (often called a readvanceable mortgage). The HELOC and a regular mortgage share one registration, usually a collateral charge, with the same lender. As you pay down the mortgage, your available HELOC room grows by the same amount.
- Standalone. A HELOC on its own, with no amortizing mortgage attached — common on a home that's paid off or nearly so.
How much you can borrow
Federally regulated lenders follow OSFI's Guideline B-20, which sets two limits:
- The revolving HELOC portion can be at most 65% of the home's value.
- Your mortgage plus HELOC together can be at most 80% of the home's value. Anything above 80% would need mortgage insurance, and HELOCs can't be insured.
Worked example: a $900,000 home
| Amount | |
|---|---|
| Home value | $900,000 |
| 80% combined limit | $720,000 |
| Less the existing mortgage | −$450,000 |
| HELOC room available | $270,000 |
| Revolving cap (65% of value) | $585,000 — not the limiting factor here |
If the same home had no mortgage at all, the 65% cap would apply instead: a standalone HELOC of up to $585,000. In both cases the lender also checks that you can afford it — the limit is the most you could borrow, not what you'll be approved for.
Want to run your own home equity line calculator? Take your home's value, multiply by 0.80, subtract your mortgage balance — then check the result against 65% of the value.
HELOC rates
HELOC interest rates are almost always variable and quoted as the lender's prime rate plus a margin — prime plus 0.50% to 1.00% is typical for a well-qualified borrower. When the Bank of Canada changes its policy rate, prime and your HELOC rate usually change with it.
That makes HELOC rates higher than most mortgage rates but far lower than unsecured line of credit interest rates or credit cards, because your home secures the debt. See how mortgage rates are set for how prime works.
Payments: the interest-only trap
Most HELOCs only require you to pay the interest each month. Borrow $50,000 at 6.00% and the minimum payment is about $250 a month — but after ten years of minimum payments you would still owe $50,000.
That flexibility is the point of a HELOC, and its main risk. Treat any HELOC balance as a loan with a payoff plan: set a fixed monthly payment that covers principal, or move a large balance into an amortizing portion if your lender allows it.
Good and bad uses of a HELOC
| Often sensible | Think twice |
|---|---|
| Renovations that add value to the home | Everyday spending or vacations |
| Consolidating high-interest debt — with a plan to repay it | Consolidating debt and then running the cards back up |
| An emergency backstop you rarely use | Investing borrowed money you can't afford to lose |
| Bridging short-term timing gaps | Covering a shortfall that will recur every month |
Borrowing against your home to invest — the strategy known as the Smith Manoeuvre — can make the interest tax-deductible, but it adds investment risk to housing debt.
HELOC, home equity loan or refinance?
- HELOC — flexible, re-borrowable, variable rate, interest-only payments. Best for ongoing or uncertain needs.
- Home equity loan — a lump sum with fixed payments. Best when you know the amount and want it repaid on schedule. See our home equity loans page.
- Refinance — replaces your mortgage with a larger one, at mortgage rates. Best for a large, one-time amount, but may trigger a prepayment penalty mid-term. See refinance your mortgage and the refinance calculator.
Costs and fine print
- Setup costs. An appraisal and legal fees may apply, though some lenders cover them.
- Collateral charge. Many HELOCs are registered for more than you borrow, sometimes up to the home's full value. That makes it easier to borrow more later, but harder to switch lenders at renewal.
- The lender can change the terms. A HELOC is a demand loan. The lender can reduce your limit or call the balance — for example, if home values fall or your finances change.
- Qualifying. Federally regulated lenders qualify you at the stress-test rate, assuming the full limit is drawn. See how much mortgage you can afford.
Sources
This article is general information, not financial advice. Examples are illustrative and rounded. Limits, rates and features vary by lender. Credit is subject to lender approval.
Frequently asked questions
Up to 65% of your home's value on the revolving line, and up to 80% combined with your mortgage. On a $900,000 home with a $450,000 mortgage, that's up to $270,000.
Almost always variable, priced at prime plus a margin. Some lenders let you lock part of the balance into a fixed-rate term.
The minimum payment is usually interest only, so the balance won't fall unless you pay more. You must repay the full balance when you sell the home or if the lender calls the loan.
It can replace 20%-plus credit card interest with a rate near prime. It only works if you repay the HELOC on a schedule and don't build the card balances back up.
Not from a federally regulated lender — the combined limit is 80% of the home's value. Some alternative and private lenders go higher, at higher rates.
See how much equity you can access
We'll compare HELOCs, home equity loans and refinancing across several lenders, and show you the cost of each.