Home equity line of credit (HELOC) pros and cons should be on every homeowner's checklist before borrowing against their home. A HELOC is a revolving credit secured by the equity in your house — flexible and convenient, but also riskier than unsecured credit. This guide explains HELOC advantages, HELOC risks in Canada, and practical steps to decide whether a HELOC fits your finances.
What is a HELOC? (Quick primer)
Definition: A HELOC is a line of credit secured by your home equity that you can draw on, repay, and draw again during the draw period.
Typical features: Variable interest rates, interest-only payment options (during the draw period), and a maximum credit limit based on a percentage of your home's value minus outstanding mortgage balance.
Note: In Canada, lenders commonly allow combined mortgage + HELOC limits up to 80% of your home's insured value without mortgage insurance.
How HELOCs work — the basics
Pre-approval and limit: Lender evaluates your home value, mortgage balance, and credit to set a maximum limit.
Draw period: You can borrow up to the limit; often you pay interest only on amounts you use.
Repayment period: After the draw period ends, you must repay principal and interest, which can increase monthly payments.
Variable rate exposure: Payments usually track a lender's prime rate; changes affect monthly cost.
HELOC pros (advantages)
Flexible access to cash. Draw when you need to — ideal for renovations, debt consolidation, or irregular expenses.
Lower interest than many unsecured options. Rates typically beat credit cards and personal loans.
Interest may be tax-deductible in some cases. If you use HELOC funds to earn investment income, interest could be deductible — check CRA rules. See CRA guidance on interest deductibility for details.
Convenient repayment structure. Paying interest-only during the draw period lowers short-term payments.
Works with chequing accounts and lines. Many lenders offer HELOCs that link to your day-to-day banking for easy transfers and payments.
HELOC cons (risks and downsides)
Home is security — risk of foreclosure. Defaulting can lead to losing your home.
Variable-rate uncertainty. Rising prime rates increase interest and monthly payments; Bank of Canada policy changes ripple through HELOC costs. Check Bank of Canada rates and trends.
Payment shock at conversion. When the draw period ends, principal plus interest payments can jump significantly.
Temptation to overspend. Easy access to funds can undermine savings or lead to higher long‑term debt.
Possible fees and terms. Appraisal fees, inactive account fees, or limited repayment flexibility may apply.
Limited to owner-occupied qualifying equity. Lenders will verify property value and outstanding mortgage balance.
HELOC vs. refinance vs. home equity loan — quick comparison
HELOC:
Flexible, revolving credit.
Best for ongoing or unpredictable expenses.
Refinance (cash-out mortgage):
Fixed loan, often lower rate than HELOC.
Best for large, one-time expenses or locking in a long-term rate.
Home equity loan:
Fixed-amount loan with fixed payments.
Predictable but less flexible than HELOC.
When a HELOC makes sense (use-cases)
Home renovations with phased spending.
Short-term bridge financing between selling and buying.
Debt consolidation when HELOC rate is meaningfully lower than credit cards.
Emergency fund supplement if you lack liquid savings (only if disciplined).
Investment funding — but only with tax guidance and risk tolerance.
When to avoid a HELOC
If you have unstable income or little emergency savings.
If funds will be used for discretionary spending (vacation, lifestyle upgrades).
If you can secure a lower fixed rate with a refinance and want payment certainty.
If you cannot tolerate the risk of losing your home.
Step-by-step: How to apply for a HELOC in Canada
Assess your equity and needs. Calculate your home's value minus outstanding mortgage to estimate available equity.
Check your credit and income. Lenders will verify income, debts, and credit history.
Compare lenders and terms. Look at prime-based margin, fees, repayment rules, and redraw options.
Request a pre-approval. Get an offer that details your maximum limit and rate structure.
Appraisal and documentation. Lender may require a property appraisal and mortgage statements.
Sign and set up access. Once approved, link to your chequing or online banking for draws and payments.
Plan repayments. Set a budget for interest, principal, and potential rate increases.
Checklist before you borrow (quick scan)
- Do I understand the variable-rate risk?
- Do I have a repayment plan for principal?
- Have I compared fixed-rate alternatives?
- Can I afford higher payments if rates rise?
- Am I using funds for value-adding or necessary expenses?
- Have I checked tax deductibility with CRA guidance?
Managing and reducing HELOC risk
Keep a repayment schedule: Aim to pay at least some principal during draw years.
Fix part of the balance: Consider converting a portion to a fixed-rate mortgage if available.
Maintain an emergency fund separate from HELOC access.
Shop rates periodically: Lenders adjust margins; switching or refinancing might save money.
Monitor the amortization timeline: Know when draw ends and repayment ramps up.
Red flags with lenders
Pressure to borrow more than you need.
Opaque fee structures or unclear conversion terms.
Promises of rate guarantees without documentation.
High penalties for early repayment or switching.
If unsure, consult a mortgage broker, financial advisor, or resources from the Financial Consumer Agency of Canada: FCAC HELOC guidance.
Where to get help and learn more
FCAC for consumer protection and HELOC basics: see their HELOC guide above.
CMHC for broader mortgage information and housing resources: CMHC mortgage and homebuying information.
Bank of Canada for interest rate trends that affect HELOCs: Bank of Canada interest rates.
CRA for rules on interest deductibility: CRA guidance on borrowing interest.
Bottom line
A HELOC is a useful financial tool for many Canadian homeowners because of its flexibility and lower rates compared with unsecured credit. However, because it's secured by your home and typically tied to variable interest rates, it carries significant risks. Weigh the HELOC pros and cons carefully, compare alternatives, and get professional advice when needed.