Home equity loan vs HELOC: how each one works in Canada

Short answer first. A home equity loan gives you one lump sum, usually at a fixed rate, with a set payment and a set end date. A HELOC — a home equity line of credit — gives you a revolving limit you can draw from, repay, and draw from again, usually at a variable rate. Both are secured against your home. That single structural difference is what actually decides which one suits you.

Everything below is about how these two products work in Canada. LoanGoose is a loan matching and comparison service, not a lender. We don't set rates and we don't make lending decisions — that's the lender's job, and your circumstances are the lender's main input.

Home equity loan vs HELOC: the difference in one table

The fastest way to see the fork in the road is to line the two up side by side.

How a home equity loan works

A home equity loan is a second mortgage. You borrow a fixed amount against the equity you've built, and the whole sum lands in your account at once. You repay it on a fixed schedule at a fixed rate, so the payment in month one is the payment in month forty. You know the cost of the money on day one, and nothing about it changes unless you refinance.

That certainty is the whole appeal. If you're consolidating a settled balance, paying for a renovation with a firm quote, or covering a one-time bill, a home equity loan turns a vague worry into a fixed monthly number. Fixed-rate mortgages in Canada are compounded semi-annually by law, which matters when you compare a quoted rate against what you'll really pay over the years.

The trade-off is that you start paying interest on the entire amount immediately, whether or not you've spent it. Borrow for a project that starts in three months and you've paid for three months of nothing. Sell the house before the term ends and you'll need to clear the balance out of the proceeds, sometimes with a prepayment charge attached.

How a HELOC works

A HELOC is a revolving line secured by your home. The lender sets a limit. You draw what you need, when you need it, and interest is charged only on the outstanding balance. Pay it down and the room comes back. Many HELOCs are interest-only during a draw period and then convert to a repayment schedule, which is often the moment borrowers stop paying attention.

Pricing is usually variable, tied to the lender's prime rate. The Bank of Canada publishes the policy interest rate that Canadian lenders' prime rates tend to follow, and you can watch it move on the Bank of Canada — rates page. When prime rises, your payment usually rises with it, without anyone asking you first.

The real hazard isn't the rate, though. It's the room. A HELOC sits in your banking app looking like available money, and available money has a way of becoming spent money. Borrowing for a kitchen this year, a vehicle repair next spring, and a wedding the year after is how a line meant for one project quietly becomes a permanent second mortgage with no end date.

Rates, payments, and the certainty you're buying

The FCAC — personal loans guidance makes a point worth repeating: the advertised rate isn't the price. What matters is the total cost of borrowing over the life of the loan, including fees and any charges the lender adds on top. There is an outer limit to how expensive borrowing can get. The Criminal Code s. 347 — criminal rate of interest sets 35% per year as the criminal rate, calculated by a defined method that aggregates interest and certain charges, and that ceiling has been in force since January 1, 2025. It's a limit on the worst cases, not a target to aim for.

Practically, the choice comes down to what you're buying with the extra cost. A fixed home equity loan usually prices higher up front in exchange for a payment that never surprises you. A variable HELOC often starts lower and moves with the market. Neither is automatically better. The question is whether you'd rather pay for certainty or accept uncertainty for flexibility.

How much can you borrow against your home?

At federally regulated lenders, a home equity line of credit is generally limited to 65% of the appraised value of your property, and total secured lending against the home is usually capped at 80%. A home equity loan, being a second mortgage, sits inside that same total. In practice, the lender's own underwriting decides the number you actually see. Secured borrowing against your home is a mortgage in the legal sense, and FCAC — mortgages is the plainest starting point for how that relationship works.

Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% and apply a qualifying stress-test rate above the contract rate, as set out in OSFI Guideline B-20 — residential mortgage underwriting. In plain terms, the lender tests whether you could still carry the payments if rates were higher than the ones you're signing up for. A line of credit that pushes your ratios near the ceiling can affect how much you can borrow later, or the terms you're offered at renewal. If you want a second read on homeownership costs, the Canada Mortgage and Housing Corporation publishes consumer information on buying and owning a home.

Which one fits your situation?

• A home equity loan fits when you're borrowing once, for a known amount, and you want a payment that won't move. A renovation with a fixed quote. A settled balance to consolidate. A one-time bill.
• A HELOC fits when the spending arrives in stages and you'd rather pay interest only on what you've actually used. A staged renovation. Uneven self-employed income. A cushion you sincerely intend to leave alone.
• Neither fits when the money would go toward everyday living expenses. Secured debt doesn't fix a shortfall. It just gives the shortfall a lien on your house.
• A smaller unsecured option may fit better when the amount is modest and you could clear it within a year or two without putting your home on the line.

When neither is a good idea

Anything secured by your home converts an unsecured problem into a housing problem. Miss payments on an unsecured loan and your credit history takes the hit. Miss payments on a home equity loan or a HELOC and the lender can take legal steps against the place you live. That's the honest trade-off, and it deserves to be said plainly rather than buried under a rate table.

Two situations deserve extra caution. First, consolidating unsecured balances into a secured loan while leaving the original limits open. The debt doesn't disappear — it moves house, and the freed-up room tends to refill. Second, using home equity to cover a gap that's likely to widen, such as a household income drop that hasn't been resolved. In both cases you're treating a symptom.

If money is already tight, the right next call is a licensed professional, not a lender. Only a licensed insolvency trustee can administer a consumer proposal or a bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. For context on how long the consequences last, a consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first. A first bankruptcy stays on a credit report for six years after discharge. Those are long shadows, and they're worth understanding before you sign anything secured.

Your credit history shapes what you're offered, so it's worth checking before you shop around. A free copy of your credit report is available from each of Canada's two national bureaus, Equifax Canada and TransUnion Canada, as explained in FCAC — credit reports and scores. If something goes wrong with a federally regulated institution, complaints go to the FCAC — complaints office. Most other lenders are licensed and supervised provincially, and FCAC — provincial and territorial regulators lists where to look in your province or territory.

Questions worth asking before you sign

1. Is the rate fixed or variable, and what triggers a change?
2. What's the total cost of borrowing, including every fee?
3. Is the payment interest-only, and for how long?
4. What happens if I sell, refinance, or want to pay it off early?
5. Does this borrowing push my total debt service close to the lender's ceiling?
6. What's my plan if my income drops by a quarter?

None of these questions require a finance degree. They require a lender willing to answer them in writing, and a borrower willing to read the answer before signing. If a lender brushes past the total cost of borrowing, that's information too.

LoanGoose is a loan matching and comparison service, not a lender. The lowest rates are only available to the most qualified applicants.