What is the difference between a HELOC and a home equity loan?

A HELOC is a revolving line of credit — you borrow as needed up to your limit and only pay interest on what you use. A home equity loan is a lump sum with fixed payments. HELOCs have variable rates; home equity loans typically have fixed rates.

What are HELOC rates in Canada?

HELOC rates in Canada are typically prime + 0.50% to prime + 1.00%. With a prime rate of 5.95%, HELOC rates range from about 6.45% to 6.95%. Home equity loan rates are usually slightly higher but fixed.

How much can I borrow with a HELOC?

In Canada, you can borrow up to 65% of your home value through a HELOC. Combined with your mortgage, total borrowing cannot exceed 80% of the home value. For example, a $600,000 home allows up to $390,000 in HELOC borrowing (if no mortgage).

Is a HELOC tax deductible in Canada?

Only if the borrowed funds are used for investment or business purposes — not personal use. Interest on a HELOC used for home renovations, vacations, or debt consolidation is not tax deductible. This distinction is the basis of the Smith Manoeuvre strategy.

Home Equity Line of Credit (HELOC) vs Home Equity Loan

Your home equity — the difference between your home’s value and what you owe — can be a powerful financial tool. The two main ways to access it are a Home Equity Line of Credit (HELOC) and a home equity loan. Here is how they compare.

HELOC vs home equity loan at a glance

Feature	HELOC	Home Equity Loan
How you receive funds	Revolving credit (draw as needed)	Lump sum
Interest rate	Variable (prime + margin)	Usually fixed
Minimum payment	Interest-only	Principal + interest
Repayment flexibility	Pay interest only or more	Fixed monthly payments
Maximum borrowing	Up to 65% of home value	Up to 80% LTV (combined)
Reusable	Yes (as you repay, credit becomes available)	No (one-time borrowing)
Typical rate	Prime + 0.50% to 1.00%	Prime + 1.00% to 2.00% (or fixed)
Best for	Ongoing or unpredictable expenses	One-time, known expenses

How a HELOC works

A HELOC functions like a credit card secured by your home:

Lender approves a credit limit based on your home equity
You draw funds as needed via cheques, transfers, or a linked card
You pay interest only on the amount borrowed (minimum payment is usually interest-only)
As you repay, credit becomes available again (revolving)

HELOC limits in Canada

Maximum HELOC: 65% of home value
HELOC + mortgage combined: Cannot exceed 80% of home value

Example

Detail	Value
Home value	$700,000
Remaining mortgage	$350,000
Maximum total borrowing (80%)	$560,000
Available for HELOC	$210,000
HELOC limit (65% cap)	$210,000 (within cap)

How a home equity loan works

A home equity loan provides a one-time lump sum:

Lender approves a loan amount based on your home equity
You receive the full amount upfront
Fixed monthly payments of principal and interest over a set term
Once repaid, the loan is closed (no revolving access)

Example

Detail	Value
Home equity loan	$100,000
Interest rate	6.50% (fixed)
Term	10 years
Monthly payment	$1,135
Total interest paid	$36,200

When to use a HELOC

Home renovations (phased)

If your renovation is happening in stages, a HELOC lets you draw funds as needed instead of paying interest on the full amount from day one.

Emergency fund

Keep a HELOC available as a backup — you only pay interest if you use it.

Investment purposes (Smith Manoeuvre)

Borrowing to invest can make the interest tax-deductible. See our Smith Manoeuvre guide for details.

Variable or uncertain expenses

When you do not know exactly how much you will need, a HELOC provides flexibility.

When to use a home equity loan

Debt consolidation

A lump sum at a fixed rate is ideal for paying off multiple high-interest debts. You know exactly what your payment will be each month.

Major one-time purchase

If you know the exact amount (full kitchen renovation, car purchase, education), a home equity loan gives payment certainty.

Disciplined repayment

Fixed payments force you to pay down the principal. HELOC interest-only payments can trap you in perpetual debt.

Risks and considerations

HELOC risks

Interest-only trap — Making only minimum payments means you never pay down the balance
Variable rate — Payments increase when rates rise
Spending temptation — Easy access to large amounts of credit
Your home is collateral — Default means losing your home
HELOC readvanceable mortgages — Some combined products automatically increase your HELOC as your mortgage is paid down, keeping total debt high

Home equity loan risks

Interest from day one — You pay interest on the full amount immediately, even if you do not use it all right away
Less flexibility — Cannot re-borrow once repaid
Your home is collateral — Same risk as HELOC

Tax implications

Use of Funds	Interest Tax Deductible?
Investing (stocks, ETFs, rental property)	Yes
Business expenses	Yes
Home renovations	No
Debt consolidation	No
Personal use (vacation, car)	No

Only interest on funds used for income-producing purposes is tax deductible in Canada. This applies to both HELOCs and home equity loans.

HELOC vs home equity loan costs

$100,000 borrowed, 5-year comparison

Metric	HELOC (prime + 0.50%)	Home Equity Loan (6.50% fixed)
Assumed rate	6.45% (variable)	6.50% (fixed)
Monthly payment (interest only for HELOC)	$538	$1,135
Balance after 5 years	$100,000 (no principal paid)	$37,900
Total interest paid	$32,250	$36,200

The HELOC costs less in interest but the balance has not decreased. The home equity loan forces principal repayment.

Bottom line

Choose a HELOC for flexible, ongoing borrowing needs and if you are disciplined about repayment. Choose a home equity loan for one-time lump sums where you want fixed payments and guaranteed payoff.

For either option, remember that your home is the collateral. Borrow conservatively and have a clear repayment plan. Use our mortgage calculator to model payments at different rates and amounts.