Home Equity Line of Credit (HELOC)

What is a HELOC?

A home equity line of credit (HELOC) is a revolving credit product that allows you to borrow against the equity you’ve built in your home. In Canada, you can typically access up to 65% of your home’s value through a HELOC, or up to 80% when combined with your mortgage, depending on your lender.

A HELOC allows you to withdraw funds as needed, and you are only required to pay interest on the amount you borrow, while the remaining credit remains available for future use. Since a HELOC is revolving credit, as you repay what you’ve borrowed, your available credit replenishes, similar to a credit card.

What questions should I ask when applying for a HELOC?

There are four key things you'll need to keep in mind when considering getting a mortgage with a home equity line of credit.

1. How much money can I borrow on a home equity line of credit?

In Canada, you can access up to 65% of the value of your home through a home equity line of credit. However, it's also important to remember that your outstanding mortgage loan balance plus your HELOC cannot exceed 80% of the value of your home. To estimate your HELOC limit:

1. Multiply your home’s value by 80% – this is the maximum combined amount you can owe on your mortgage and HELOC.
2. Subtract your current mortgage balance from that number.
3. The result is the maximum HELOC you could qualify for, as long as it doesn’t exceed 65% of your home’s value.

Let’s say your home is worth $600,000 and you owe $200,000 on your mortgage. Here’s how you can calculate your HELOC amount-

• 80% of $600,000 = $480,000 (maximum loan-to-value ratio)
• $480,000 – $200,000 = $280,000 (your potential HELOC limit)
• $280,000 ÷ $600,000 = 46.7% (within the 65% HELOC cap)

So in this case, you could qualify for a HELOC of up to $280,000.

2. How do I receive the funds with a HELOC?

With a home equity line of credit, the entire credit available is not advanced up front. Instead, it's a revolving line of credit, which means you can borrow as much or as little as you need – up to your approved limit – and reuse the credit as you repay it. You only pay interest on the amount you've actually withdrawn, and not the entire credit limit. This interest is calculated daily at a variable rate based on Canada’s Prime rate.

Home equity line of credit interest rates are often higher than variable mortgage rates and can fluctuate. While a variable mortgage might be priced as Prime – 0.50%, a HELOC is typically priced as Prime + a markup. Because each lender sets their own markup, it’s worth shopping around for various HELOC rates before applying.

3. Do I only have to make interest payments on a HELOC?

Yes, if you are using any portion of your home equity line of credit, you will need to make a monthly interest-only payment on the amount. These payments are usually withdrawn automatically from your bank account on the same day each month.

Since there’s no fixed repayment schedule for the principal, you’ll need to make extra payments voluntarily if you want to reduce your balance. This gives you flexibility, but it also requires discipline to avoid carrying long-term debt.

4. How does the Bank of Canada affect HELOC rates?

HELOC rates are a type of variable-rate debt, meaning they’re influenced by the benchmark Overnight Lending Rate set by the Bank of Canada. When the Bank raises or lowers this benchmark rate, lenders adjust their Prime rates, and your HELOC rate moves accordingly.

From July 2024 to March 2025, the Bank of Canada made a series of rate cuts, lowering the overnight rate from 5.00% to 2.75%. The Bank then held the target rate steady for three announcements, before cutting it again in September to 2.50%. In all, these cuts lowered the Prime rate from 7.20% to 4.70%.

Because HELOCs are typically priced as Prime + a markup, this series of rate cuts significantly reduced borrowing costs for HELOC users. For example, if your HELOC rate is Prime + 0.50%, your rate would have dropped from 7.70% to 5.20% over that period.

5. What do I need to apply for a HELOC?

To qualify for a HELOC, lenders assess your overall financial profile and the amount of equity you’ve built in your home. Here’s what you’ll typically need to provide:

• Proof of homeownership and property details: This includes your mortgage statement, title information, and property tax statements, as applicable. 
• Proof of equity: Lenders need to determine that you’ve at least 20% equity in your house. You may need to provide documents like a recent appraisal or agree to a new one arranged by the lender.
• Proof of income: This usually includes recent pay stubs, T4 slips, or your most recent Notice of Assessment (NOA) if you’re self-employed.
• A healthy credit score: Most lenders require a credit score of at least 680 to qualify for the best HELOC rates. A score of 600 is often the minimum to be considered at all.
• Passing the stress test: You’ll need to prove that you can afford the payments at either the BoC’s qualifying rate (currently 5.25%) or your contract rate + 2%, whichever is higher.
  

What are the different types of HELOCs?

HELOCs can either stand on their own or be combined with your mortgage, and the option you choose affects how your credit limit works, how you repay the debt, and how much flexibility you have as your equity grows.

• Stand-alone home equity line of credit: A separate line of credit not tied to your mortgage. You can borrow up to 65% of your home’s value, based on your income and equity. You can borrow up to 65% of your home’s value, based on your income and available equity. But because it’s not linked to your mortgage, your credit limit doesn’t increase as you pay down your loan, it stays fixed unless you reapply.
• HELOC combined with a mortgage: Also referred to as a readvanceable mortgage, this product combines a HELOC with a mortgage. As you pay down your mortgage principal, your available HELOC credit automatically increases, giving you more borrowing power over time. You can also choose to make interest-only payments on the HELOC portion, while your mortgage follows its regular amortization schedule.

How to pay off a HELOC faster

While HELOCs only require interest payments by default, here are a few smart strategies to pay off your HELOC faster:

• Turn your HELOC into a fixed-term loan: Some lenders let you lock in a portion of your HELOC at a fixed rate with a structured amortization. If budgeting is a challenge, this can simulate a traditional loan and keep your payoff timeline on track.
• Use lump sums wisely: Apply any tax refunds, bonuses, or extra income directly to your HELOC. There are no prepayment penalties, so you can pay down your balance at any time.
• Switch to biweekly payments: Instead of making the usual interest-only monthly payments, make fixed biweekly principal plus interest payments. Over a year, that’s the equivalent of one extra monthly payment, and it goes entirely toward paying down your balance.
• Avoid “re-borrowing” creep: Because HELOCs replenish as you repay, it’s tempting to dip back in. Try restricting access (e.g. unlinking the HELOC from your debit card or banking app) to simulate a closed-end loan — especially if your original goal was one-time borrowing.
• Treat it like a loan, not a credit card: If you're using your HELOC for a one-time expense, act as if it's a fixed-term loan and budget for full repayment within a set timeline.

Also read: 

• Prime Rate Canada
• Overnight Lending Rate in Canada
• Fixed vs. variable mortgage rates
• Bank of Canada holds target rate at 4.5%
• How to choose between a refinance, a HELOC and a second mortgage