A HELOC, or home equity line of credit, lets you borrow against your home at a rate far lower than most loans or credit cards. It works like a giant, flexible line of credit, so you draw what you need, when you need it, and you only pay interest on what you use. However, it is secured by your home, so it deserves careful thought.
So this guide explains how a HELOC works in Canada, how to qualify, what it costs each month and the risks to weigh first.
How a home equity line of credit works
Basically, it is a revolving line of credit secured by your home. Once it is approved, you can then borrow, repay and borrow again up to your limit. In addition, most lenders only require interest payments each month, so the minimum payment is low.
Many also come bundled with your mortgage in a single “readvanceable” product. In that case, as you pay down your mortgage, your available credit also grows.
HELOC vs. refinancing your mortgage
HELOC
- Borrow only what you need, when you need it
- Interest-only minimum payments
- Variable rate tied to prime
- No penalty to repay
Refinance
- Borrow a lump sum upfront
- Principal and interest payments
- Fixed or variable rate options
- May trigger a prepayment penalty
For a deeper comparison, also read our guide to refinancing to access home equity.
How much can you borrow with a HELOC?
Specifically, federal rules set two limits for federally regulated lenders. First, the line of credit alone cannot exceed 65% of your home’s value, according to the FCAC. Second, your mortgage plus the line of credit cannot exceed 80% of the value.
Example: a $900,000 home with a $450,000 mortgage
First, find 80% of the value
$900,000 × 80% = $720,000 maximum total borrowing.
Next, subtract your mortgage
$720,000 − $450,000 = $270,000 of available equity.
Then check the 65% cap
The credit line alone must stay under $585,000, so the $270,000 limit applies.
Finally, get approved
Your lender then confirms the limit based on your income and credit.
What does a HELOC cost per month?
These rates are usually variable and priced at prime plus a margin. So with prime at 4.45% at the big banks, a typical rate is about 4.95% to 5.45%. Therefore, your monthly cost depends on how much you have drawn.
Monthly cost of a HELOC at 4.95%
| Amount borrowed | Interest-only payment | Repaid over 10 years |
|---|---|---|
| $50,000 | $206 | $528 |
| $70,000 | $289 | $739 |
| $100,000 | $412 | $1,056 |
| $150,000 | $619 | $1,584 |
So how much would a $100,000 HELOC cost per month? About $412 when you only pay interest. However, to actually pay it off within 10 years, you would need about $1,056 a month.
How to qualify for a HELOC in Canada
In fact, qualifying for a HELOC is similar to qualifying for a mortgage. Lenders generally look at:
- Equity: You usually need at least 20% equity in your home.
- Income: Lenders check that you can afford the payments, and they also apply the stress test to the credit limit as well.
- Credit: A solid credit history helps you get approved, and it can also lower your margin over prime.
- The property: Also, an appraisal confirms your home’s current value.
Also, remember that setting one up may involve appraisal and legal fees. Some lenders cover these, so ask before you apply.
Smart ways to use a HELOC (and risky ones)
Ways to use home equity
Often sensible
- Home renovations that add value
- Consolidating high-interest debt
- An emergency backup fund
- Bridging a short-term cash gap
Riskier
- Everyday spending
- Vacations and luxury purchases
- Speculative investing
- Covering ongoing budget shortfalls
Meanwhile, if you are considering using home equity to buy a second property, read our guides on rental property mortgages and how many mortgages you can have.
Risks to understand before you borrow
- Variable rates: When the Bank of Canada raises rates, your borrowing cost rises right away.
- Callable debt: Lenders can reduce or freeze your limit, especially if home values fall.
- Your home is the security: So if you cannot repay, the lender can ultimately take action against the property.
Frequently asked questions
At about 4.95%, a $100,000 HELOC costs roughly $412 a month in interest-only payments. However, to pay it off over 10 years, the payment would be about $1,056 a month.
At 4.95%, interest-only payments on $70,000 are about $289 a month, while repaying it over 10 years costs about $739 a month.
You generally need at least 20% equity, enough income to pass the stress test, a solid credit history and an appraisal that confirms your home’s value.
The HELOC portion can be up to 65% of your home’s value, and your mortgage plus credit line together can be up to 80%.
Sources: FCAC: Home equity lines of credit · OSFI Guideline B-20 · Bank of Canada policy rate