HELOC Explained: How a Home Equity Line of Credit Works

A home equity line of credit lets you borrow against the equity in your home, usually at a lower rate than unsecured credit. Your home secures the debt.

By Promissory.ca Editorial Team Reviewed against official Canadian sources Last updated: 2026-09-16

What a HELOC is

A home equity line of credit, or HELOC, is a revolving credit facility secured by your home. Revolving means you can borrow, repay and borrow again up to an approved limit, much like a credit card. Secured means the lender holds a charge against your property, so if you default the lender can take steps to recover the debt from your home.

Because the loan is secured, lenders often price it lower than unsecured credit such as credit cards or personal lines of credit. That lower cost is the main attraction. The trade off is that the debt is tied to the roof over your head, which raises the stakes considerably.

How a HELOC works

You apply for a limit based on the equity in your home. Equity is the difference between what the home is worth and what you owe on it. Once approved, you can draw funds as needed, either by transferring money to your account or by using an access card or cheques in some setups. Interest is charged only on the amount you have actually drawn, not the full limit.

Payments are usually flexible. Many HELOCs require only interest during the draw period, which keeps the minimum payment low but means the balance does not shrink unless you pay more than the interest. That flexibility is convenient, but it can also let a balance sit for years without meaningfully reducing it.

How much you can borrow

The limit depends on your home value, your existing mortgage and your lender policy. Lenders commonly allow total borrowing of up to 65% of the property value for a HELOC, or up to 80% when combined with a mortgage, though policies vary. The available room is calculated by taking the applicable percentage of your home value and subtracting what you already owe.

If your home value rises, some lenders allow you to apply for an increased limit. If it falls, the lender may reduce or freeze the available room. That is an important difference from a fixed loan, where the amount is set once and does not move with the market.

Qualifying for a HELOC

Lenders look at the same fundamentals as a mortgage: income, credit history, existing debts and the equity in your home. Because the home is collateral, they also want an up to date valuation, which may involve an appraisal or an automated estimate. A HELOC usually sits behind or alongside your mortgage, and the lender needs to be comfortable with the total debt secured against the property.

A strong credit profile and a solid equity position improve your chances and can earn a better rate. A borrower with a high debt load relative to income may be offered a smaller limit or none at all.

Setup costs

Setting up a HELOC can involve an appraisal fee, legal or registration costs to place the charge on title, and sometimes an annual or administrative fee. Some lenders waive part of these costs as a promotion. Because the fees vary, ask for a clear list before you apply. A HELOC that costs a lot to open is harder to justify if you only plan to borrow a small amount.

How the rate works

HELOC rates are typically variable and tied to the lender prime rate, which moves with the policy rate set by the Bank of Canada. Your rate is usually quoted as prime plus a spread. When prime changes, your interest cost changes, which means your payment can rise even if you do not draw more money. A borrower who uses the full limit and pays only interest is fully exposed to that movement.

HELOC versus a credit card

The lower rate is real, but so is the difference in consequence. Failing to pay a credit card damages your credit. Failing to pay a HELOC can put your home in jeopardy.

Readvanceable and combined products

Some lenders offer a combined mortgage and HELOC in one product, sometimes called a readvanceable line. As you pay down the mortgage portion, the available HELOC room can grow, letting you access equity without a new application. This can be useful for planned renovations or investments, but it also makes it easy to keep borrowing as you build equity, which can slow your path to owning your home outright.

Risks to weigh

The central risk is obvious: your home is the collateral. If your circumstances change and you cannot keep up with payments, the lender can take legal steps against the property. A HELOC also tends to make spending easy, because the funds are available on demand and the minimum payment can be small. Balances can creep upward without a clear repayment plan.

Interest rate risk matters too. Because the rate is usually variable, a rise increases your cost, and a borrower at the limit feels it immediately. A HELOC is best used with a plan to repay, not as an open ended supplement to income.

Reducing or closing a HELOC

If you no longer need the credit, you can typically ask the lender to reduce the limit or close the account and discharge the charge from title. Closing it removes the temptation to borrow and may simplify things if you sell or refinance. Ask about any fees for discharge and how long the process takes. Keeping an unused HELOC open still leaves a charge on your property, which can complicate a future sale or refinance.

Promissory.ca is not a lender or a mortgage broker and charges consumers no fee; it may receive compensation from lending partners. A licensed mortgage professional can explain what you qualify for and whether a HELOC suits your goals.