Home equity loan vs HELOC: which one fits how you'll spend the money
A home equity loan and a HELOC both borrow against your home, but they suit different spending. Here's how each works in Canada, the limits and costs, and two worked examples, one-time and staged spending, that show which fits your plan.
A home equity loan in Canada gives you one lump sum with fixed principal-and-interest payments on a set schedule, and you can't re-borrow what you repay. A HELOC is a revolving credit line, usually at a variable rate, where you pay interest only on what you use and can borrow again. FCAC puts the usual limit at up to 80% of your home's value for a home equity loan and 65% for a HELOC. The simple rule: if you'll spend the money all at once and want a fixed payoff, a home equity loan fits; if you'll spend it in stages or aren't sure how much you need, a HELOC usually costs less interest along the way. In our staged-renovation illustration, drawing $60,000 over six months on a HELOC costs about $960 in interest in that period, versus about $1,890 on a loan taken all at once.
Key takeaways
- →Home equity loan: one lump sum, fixed payments of principal and interest on a schedule, and no re-borrowing.
- →HELOC: a revolving line, usually variable-rate; you pay interest only on what you've drawn and can borrow again.
- →Limits differ: FCAC says you can usually borrow up to 80% of your home's value with a home equity loan and up to 65% with a HELOC.
- →Match the product to the spending. One-time cost with a firm budget: a loan. Staged or uncertain costs: a HELOC.
- →Both are secured by your home. If you can't repay, you could lose it, so budget the repayment before you borrow.
Short answer: A home equity loan in Canada gives you a one-time lump sum that you repay in fixed amounts of principal and interest on a set schedule; once it's repaid, you can't borrow it again [1]. A HELOC is a revolving line of credit secured by your home, usually at a variable rate, where you only pay interest on what you use and can re-borrow as you repay [2]. Choose by how you'll spend the money: all at once with a fixed plan points to a loan; in stages or uncertain amounts points to a HELOC.
This guide compares the two side by side, shows two worked examples and explains when neither is the best fit. To see how we arrange home equity lines across lenders, visit our home equity line of credit page.
How a home equity loan works in Canada
According to FCAC, a home equity loan is a one-time lump-sum payment of up to 80% of your home's value [1]. You pay interest on the full amount from day one, and you repay fixed amounts on a fixed term and schedule, covering principal and interest [1]. Rates can be fixed or variable and are generally higher than on a mortgage [1].
In our experience, a standalone "home equity loan" is less commonly marketed in Canada than in the U.S. Depending on the lender, the same lump-sum, fixed-payment structure may come as a second mortgage, a fixed-rate term inside a readvanceable mortgage, or extra money added to your mortgage through a refinance. The trade-offs below apply to all of them.
How a HELOC works
A HELOC works much like a regular line of credit: you can borrow up to your limit whenever you want, repay and borrow again [1]. You only pay interest on the amount you've drawn, and your lender may require interest-only payments or interest plus part of the principal [2]. Most HELOCs have a variable rate based on the lender's prime rate, which can change when the Bank of Canada moves its policy rate [2]. Our guide to HELOC rates in Canada explains how prime plus a spread works.
Home equity loan vs HELOC at a glance
| Home equity loan | HELOC | |
|---|---|---|
| How you get the money | One lump sum [1] | Draw as needed, up to your limit [2] |
| Usual maximum | Up to 80% of home value [1] | Up to 65% of home value [2] |
| Rate | Fixed or variable; generally higher than a mortgage [1] | Usually variable, tied to prime [2] |
| Interest charged on | The full amount from day one [1] | Only what you've drawn [2] |
| Payments | Fixed principal and interest [1] | Interest-only or interest plus some principal [2] |
| Re-borrow what you repay? | No [1] | Yes [2] |
| Typical fees | Appraisal, title search, title insurance, legal [1] | Appraisal, legal, title search; possibly admin or monthly fees and discharge fees [2] |
Qualifying: for a HELOC, FCAC says you need more than 35% equity for a standalone HELOC or 20% for one combined with a mortgage, and you must pass the stress test at a bank [2]: for uninsured borrowing at federally regulated lenders, that's the greater of your contract rate plus 2% or 5.25% [3]. For either product, lenders look at your income, credit and debt ratios; our guide to GDS and TDS ratios explains the math.
Not sure which fits your plan? A licensed 8Twelve agent can compare home equity loans, HELOCs and second mortgages across 65+ lenders and show the payment for each, at no cost to you, OAC. Explore HELOC options
Example 1: a one-time $40,000 cost
Illustration: you need $40,000 for a new roof, paid in one go. Assume a home equity loan at 6.49% fixed over 10 years, and a HELOC at 5.49% variable. These rates are assumptions for illustration, not quotes or current market rates.
| $40,000 used at once | Home equity loan, 6.49% fixed, 10 years | HELOC, 5.49%, interest-only | HELOC, 5.49%, repaid over 10 years |
|---|---|---|---|
| Monthly payment | about $452 | about $183 | about $434 |
| Owed after 5 years | about $23,200 | $40,000 | about $22,700 |
| Interest over 5 years | about $10,300 | about $11,000 | about $8,800 |
| Rate certainty | Fixed for the term | Changes with prime | Changes with prime |
Illustrative only, not an offer. Loan uses semi-annual compounding; HELOC uses monthly interest at a rate held flat for the whole period. Calculated in Python. Fees not included.
What it shows: for a one-time cost, the structure matters as much as the rate. The interest-only HELOC has the lowest payment but, after five years, you still owe the full $40,000 and have paid the most interest. A HELOC you repay on a schedule can cost less than the loan if the rate stays where it is, but every 1-point rise in prime adds about $33 a month to the interest on $40,000. The loan costs more here, but the payment never changes and the debt is gone in 10 years. FCAC warns that if you only pay the interest on a HELOC, you won't pay off your loan [2].
Example 2: a $60,000 renovation paid in stages
Illustration: a $60,000 kitchen renovation, with $10,000 paid to the contractor at the start of each month for six months. Same assumed rates.
| First six months | Home equity loan ($60,000 up front) | HELOC (draw $10,000 a month) |
|---|---|---|
| Interest paid in the six months | about $1,890 | about $960 |
| Payments start | Right away: about $678 a month | Interest on what's drawn, rising as you draw |
Illustrative only. Loan payment is principal and interest over 10 years at 6.49%; HELOC interest is monthly on the drawn balance at 5.49%. Calculated in Python.
What it shows: with staged spending, the loan charges interest on money that's sitting in your account waiting for the next invoice. The HELOC charges interest only as you draw, and if the job comes in under budget, you never borrow the rest. That's why a HELOC often fits renovations, and a loan fits a single, known cost.
Pros and cons
Home equity loan - Pros: a fixed payment and payoff date (with a fixed rate); no temptation to re-borrow. - Cons: interest on the whole amount from day one; usually a higher rate than a mortgage [1]; can't re-borrow.
HELOC - Pros: pay interest only on what you use; flexible repayment; re-borrow without reapplying [2]. - Cons: variable rate risk; interest-only payments don't reduce the debt; easy access can tempt you to borrow more than you can repay [2].
Step by step: choosing with a broker
- Write down how you'll spend the money: one payment or several, and how sure the budget is.
- Check your equity: home value minus everything secured on it [1].
- Compare offers for a loan, a HELOC and, if relevant, a refinance or second mortgage.
- Stress-test your budget: can you afford the HELOC if prime rises, or the loan payment from month one?
- Set a repayment plan before you sign, especially for a HELOC [2].
- Ask for a lower HELOC limit if a high limit would tempt you to overspend; FCAC suggests this [2].
When neither is the best fit
- You're near renewal and need a large amount. A refinance at renewal may avoid a penalty and give you a mortgage rate; compare it in our HELOC vs refinance guide.
- You're 55+ and want no monthly payments. A reverse mortgage works differently; see reverse mortgage requirements.
- You want to see every option at once. Our home equity takeout guide compares six ways to borrow against your home.
From our desk: We ask one question first: "Do you know the exact amount and the date you'll pay it?" If yes, a fixed payoff usually serves people well. If the answer is "roughly" or "in stages," a HELOC with a written repayment plan is usually the better tool.
A home equity loan and a HELOC borrow against the same equity in very different ways. Match the product to how you'll spend the money, compare total cost, and set a repayment plan before you sign.
Run the numbers: compare payments with our mortgage payment calculator, or see how HELOC rates are set.
This article is for general information only and isn't financial, legal or tax advice. Rates, products and terms change without notice and are available on approved credit (OAC). The rate and terms you qualify for depend on your individual financial situation, including credit, income, property and loan-to-value. "Best rates" means the most suitable options available for your situation, not a guarantee of the lowest rate. Example rates and payments are for illustration only, as of October 2026, and are not an offer. 8Twelve Mortgage arranges mortgages through 65+ lenders and does not lend directly. Licensed across Canada — see our licences.
Example rates and payments are for illustration only, as of October 28, 2026, and are not an offer or a statement of current market rates. Your actual rate and terms depend on the lender and your situation, OAC. Rules checked against FCAC on October 28, 2026. 8Twelve does not lend or fund mortgages, HELOCs or second mortgages; we arrange them with third-party lenders.
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Last reviewed on October 29, 2026