The do's and don’ts of using a HELOC

This piece was originally published on February 11, 2019, and was updated on June 3, 2025.

What is a HELOC and how does it work?

A home equity line of credit is a convenient way to borrow money using the equity you’ve built in your home. A HELOC gives you access to a revolving line of credit, similar to a credit card. Because it’s secured against your home, a HELOC typically comes with:

• Lower interest rates than unsecured loans or credit cards
• Flexible repayment terms
• Access to large credit limits (up to 65% of your home’s value, minus what you still owe on your mortgage)

Since your property backs the loan, lenders consider it less risky than other types of credit. While technically you could repay the full balance by selling your home, a smart HELOC strategy doesn’t rely on that. It’s best to borrow only what you can comfortably repay, without needing to give up your house.

How does the home equity line of credit work differently from a personal loan?

Both personal loans and HELOCs can help you access funds for major expenses, but they work very differently when it comes to structure, interest, and repayment. Here's a breakdown of how a personal loan vs. a HELOC compares:

The do's of using a HELOC wisely

When used strategically, a HELOC can be a powerful financial tool. Here are some smart ways to make the most of your home equity.

1. Use a HELOC to consolidate high-interest debt

If you’re carrying high-interest credit card or loan balances, a HELOC can be a smart way to consolidate that debt into a single, lower-interest credit line. HELOCs are famous for their low interest rates. The best HELOC rates in Canada are currently Prime plus 0.5% – putting total interest on a HELOC at about 5.45%. Compare that with an unsecured line of credit that will be closer to 10%, or a credit card that charges around 20%.

If you have $20,000 in credit card debt, you’ll pay $333 a month in interest at 20%. Compare that with about $90 at 5.45%, and you’ll see how a HELOC can make it easier to repay your debt much faster.

2. Use a HELOC to fund home improvement projects that may add to the value of your home

If you’ve been considering a renovation, a HELOC might be a good way to fund it – especially if it will add value to your home. For example, renovating your kitchen and bathrooms are among the highest return on investment jobs you can do. You can reasonably expect that $20,000 in kitchen renovations will add $15,000 to the value of your home. Plus, you get to enjoy a nice new kitchen!

Also read: Do you need home insurance for a renovation?

3. Make a plan to repay the money you owe on your HELOC

Think of your HELOC like a second mortgage (because technically, it is). Make a plan to pay back the money you owe on your HELOC, and at the very least, try to pay it off in lockstep with your mortgage.

For example, if you owe $100,000 on your HELOC, and you have 20 years left on your mortgage, try to pay back $417 plus whatever interest you owe every month to pay off your HELOC at the same time you’ll pay off your mortgage. ($100,000 / 240 months = $416.67).

4. Shop around for the best HELOC rates

Just like with a mortgage, you don’t have to get your HELOC from your everyday bank or even from the same lender that holds your mortgage. Any major lender in Canada can offer you a HELOC, so it pays to shop around.

HELOC rates vary between lenders, and even a small difference in the interest rate can add up to thousands of dollars over time, especially if you’re borrowing a large amount. Consider using a mortgage broker to help you arrange a HELOC.

The don’ts of using a HELOC 

Because a HELOC is secured by your home, using it carelessly can have serious consequences. Here are some common mistakes to avoid when tapping into your home equity.

1. Use a HELOC to fund spending you should pay for with savings

A HELOC can be a smart way to fund home improvements, because it’s tied to the value of your property, just like your mortgage. In that sense, using a HELOC to upgrade your kitchen isn’t much different than using a mortgage to buy the home in the first place.

But using a HELOC to pay for a vacation? That’s a different story. It’s like putting your trip to Greece on your mortgage. The money still needs to be repaid—and if you can’t, your home is on the line.

2. Use a HELOC to stash away debt you don’t intend to repay

Transferring high-interest debt, like credit card balances, to a HELOC can be smart, but only if you treat it as a short-term solution with a clear repayment plan.

A HELOC’s low minimum payments (often just the interest) can create the illusion that your debt has disappeared. Suddenly, your payment drops from $300 to $90, and your cleared credit cards tempt you to start spending again. Avoid this debt spiral by:

• Setting a timeline to pay off the balance; don’t just make interest-only payments
• Considering cancelling or lowering your credit card limits if overspending is a risk
• Reviewing your budget to make sure you’re not spending more than you earn
  
  

3. Fall into the trap of making interest-only payments

When you take out a HELOC, the minimum payment is just whatever interest you owe. You can borrow $100,000 and only pay $454 a month – but that only maintains the interest. Don’t fall into this trap. Even if you make your minimum payment every month for a decade, you’ll still owe $100,000 – and you’ll have paid almost $45,000 in interest.

4. Forget about the expensive setup costs

HELOCs are a convenient way to borrow large sums of money, but they’re not convenient to set up. Unlike a credit card or unsecured line of credit, which you can usually be approved for in less than a day, HELOCs need a lot of work to get going.

The application process is similar to getting a mortgage. You’ll have to provide proof of your income, assets and all debts. You may have to pay a fee for the lender to appraise your home (typically around $300). And because the loan will be registered as a second mortgage, you’ll have to hire a real estate lawyer to get it set up (typically around $1,000).

In all, you’re reasonably looking at spending a minimum of $1,300 to set up a HELOC, and the process can take several weeks. If you’re thinking about a HELOC as a way to get your hands on some quick cash, you might want to consider other options.

The bottom line

Whether you’re using a HELOC to pay down your mortgage or cover a major renovation project, the key is discipline. Stick to high-impact uses, avoid treating your HELOC like free money, and resist the temptation to make interest-only payments long-term. Before applying, take time to compare rates and understand how to get a HELOC loan that fits your financial goals – not just your borrowing limit.

Also read:

• How to choose between a refinance, a HELOC and a second mortgage
• 5 Times to Revisit Your Financial Plan
• The Bank of Mom and Dad and Your Down Payment
• Pros and Cons of Using a Mortgage Broker
• Questions to Ask Your Mortgage Broker