Your home can help you borrow money when you need it. In Canada, two common ways are a home equity line of credit (HELOC) and a home equity loan.
They both use the value of your home, but they work differently. Not sure what to pick? Wondering what is a HELOC mortgage vs HELOC? You’re not alone. We’ll make it clear.
At AJP Mortgage, we explain everything in plain language and help you choose what’s best for you.
Picking the right option can help with things like home repairs, paying off debt, or saving for the future. The wrong one could cost you more.
In this guide, we’ll show you what home equity means, how these two options compare, when to use each one, and how we can help make it all easy.
Understanding Home Equity
Your home can be a source of extra money through something called equity. Let’s take a closer look at what it is and how you can use it wisely.
What Is Home Equity
Home equity is the difference between your home’s current market value and the balance you owe on your mortgage. For example, if your home is worth $600,000 and you owe $400,000, you have $200,000 in equity. This equity represents your ownership stake in the property.
How Equity Builds Over Time
Equity grows in two main ways. First, each mortgage payment you make reduces the principal balance, slowly increasing your ownership. Second, if your home’s value rises due to market trends or renovations you complete, your equity grows further. Painting, upgrading kitchens or bathrooms, and improving curb appeal can all boost value.
Why Homeowners Tap Equity
Homeowners tap into equity for many reasons. Common uses include:
Financing renovations that improve living space or increase property value
Consolidating high interest debts into a lower cost option
Funding life events like education or weddings
Covering emergency expenses without selling investments
Investing in a business or income producing property
Knowing how much equity you have and what it can do sets the stage for choosing the right borrowing product.
What Is a Home Equity Line of Credit (HELOC)
A HELOC lets you borrow money as you need it, using your home’s value. Here’s what it means and how it can work for you.
Definition and Basic Structure
A HELOC is like a credit card backed by your home. You get approved for a credit limit based on your equity and can draw, repay, and redraw funds during the draw period, typically five to ten years.
How It Works
Once approved, you get access to a set amount, for example $100,000. You can withdraw what you need, when you need it. During the draw period, you might pay interest only. After that, a repayment period begins where you pay back both principal and interest over a set time.
Interest Rate Features
HELOC rates are variable. They track the lender’s prime rate, so if the prime rate rises, your rate and payments go up. If the prime rate falls, you benefit from lower payments.
Payment Requirements During Draw Period
Many lenders allow interest only payments during the draw period. This keeps early payments low but means you are not reducing the principal unless you choose to. Paying down principal early is wise to reduce total interest.
Renewals and Review
At the end of the draw period, the lender reviews your line. They may adjust your limit or terms based on your equity and credit. You then enter the repayment period, which often lasts ten to twenty years.
Typical Uses
Common HELOC uses include:
Advantages of HELOC
Potential Drawbacks
What Is a Home Equity Loan or Second Mortgage
A home equity loan or second mortgage gives you a one-time lump sum based on your home’s value. Here’s how it works and when it might make sense.
Definition and Basic Structure
A home equity loan, or second mortgage, is a lump sum loan against your equity. You borrow one fixed amount and repay it plus interest on a set amortization schedule.
How It Works?
After approval, you receive the full loan, for example $75,000, and start fixed monthly payments right away. Payments combine principal and interest over a typical term of five to ten years.
Interest Rate Features
Rates on equity loans can be fixed or variable. Fixed rates give payment certainty. Variable rates may start lower but carry rate rise risk.
Repayment Requirements
You repay principal and interest each month. The schedule is set at the start, so you know exactly when the loan is paid off if you stick to the plan.
Comparison to Primary Mortgage
This is a separate mortgage on your title. Your overall mortgage debt increases. Lenders look at combined debts when assessing your borrowing capacity.
Typical Uses
Advantages of Home Equity Loan
Potential Drawbacks
what is a heloc mortgage vs heloc?
The terms sound similar, but they’re not the same. Let’s clear up the confusion between a HELOC mortgage and a HELOC so you know what to expect.
Access to Funds
HELOC (Home Equity Line of Credit)
You get approved for a credit limit and can borrow as needed. It works like a credit card. You can take money out, repay it, and borrow again. During the draw period, you may only pay interest. Later, you start paying back the principal too.
Home Equity Loan
You get a lump sum all at once. It comes with fixed monthly payments for a set term. You can’t borrow more after that. Best for one-time costs like renovations or big purchases.
Payment Structure
HELOC:
At first, you usually just pay the interest. Paying down the actual amount you borrowed is optional, so early payments stay low.
Home Equity Loan:
You make steady monthly payments right from the start. Each one goes toward both interest and the amount you borrowed.
Interest Rate Type and Risk
HELOC:
Usually has a variable rate that changes with the prime rate. If rates go up, your payments can rise too. This makes it less predictable month to month.
Home Equity Loan:
Usually has a fixed rate, so your payments stay the same. It’s easier to plan your budget. Some lenders may offer variable rates, but fixed is more common.
Term and Amortization
HELOC:
Starts with a draw period where you can borrow as needed and usually pay interest only. Then it moves to a repayment period where you pay back both interest and principal. The timeline depends on your lender’s terms.
Home Equity Loan:
Comes with a fixed repayment plan from the start, often five to ten years. You make regular payments that cover both the loan and the interest.
Flexibility and Planning
HELOC:
Great for costs that happen over time or aren’t set in stone. You need to be careful with how much you borrow and repay.
Home Equity Loan:
Best when you know exactly how much you need to spend at once. Fixed payments make it easier to plan your budget.
Cost Considerations
HELOC:
You pay interest only on what you borrow, and the rate can change over time. Some lenders may also charge yearly fees.
Home Equity Loan:
The interest rate is usually fixed, so your payments stay the same. You might also pay fees for appraisal, legal work, or if you pay off the loan early.
Impact on Credit and Borrowing Capacity
HELOC:
Your credit limit counts as part of your available credit, which can affect your credit score. The amount you actually borrow affects how lenders see your debt levels.
Home Equity Loan:
The full loan amount counts as debt from the start. Because payments are fixed, it’s easier for lenders to include them when checking your finances.
Tax Implications
Interest on personal use is not deductible
Interest may be deductible if funds are used for income producing investments
Keep careful records of fund use for tax purposes
Suitability Based on Homeowner Profile
HELOC:
Best if you can control your spending and want to borrow money when you need it. It’s flexible for things that cost different amounts over time, but payments can change.
Home Equity Loan:
Good if you want steady monthly payments and know how much money you need right away. You get all the money upfront, so it’s easier to plan your budget.
When to Use a HELOC versus a Home Equity Loan?
Not sure which option fits your needs? Learn when it makes more sense to use a HELOC and when a home equity loan might be the better choice.
Financing Renovation Projects
HELOC:
Great if you’re working on smaller projects in stages, like fixing rooms one at a time. You can borrow what you need for each step, repay it, and then borrow again if needed. This gives you flexibility and helps manage cash flow.
Home Equity Loan:
Better for one big project where you know the total cost upfront, like a major renovation. You get the full amount all at once, so you have the money ready right away to pay contractors or buy materials.
Emergency Fund or Unexpected Costs
HELOC:
Works like a standby line of credit. You can borrow when needed and only pay interest on the amount you use. It’s flexible and handy for emergencies, ongoing projects, or unexpected costs.
Home Equity Loan:
Gives you a lump sum upfront, so it’s not ideal unless you have a clear plan. If you don’t use the funds right away, you’ll still be paying interest on the full amount from day one. Best used when timing and costs are known.
Debt Consolidation
HELOC:
You can use it to pay off other debts at lower interest rates, but you need to be careful not to borrow more again and increase your balance.
Home Equity Loan:
With fixed monthly payments, it’s easier to pay off your debts on time and avoid adding more. This helps you stick to your plan and finish paying sooner.
Education or Major Life Events
HELOC:
Great if you want to pay tuition in installments. You can withdraw funds as each payment is due, so you only borrow what you need at that moment. This helps manage cash flow without borrowing too much upfront.
Home Equity Loan:
Best if you know the full tuition cost ahead of time. You get a lump sum all at once, so you have the money ready to pay the entire tuition or other large education expenses. This makes planning easier with fixed payments.
Business Investment or Income Producing Uses
HELOC:
Offers flexibility when your cash flow changes. You can borrow and repay as needed. If used for investments, the interest might be tax deductible.
Home Equity Loan:
Good for planned big expenses with a fixed amount. You get a clear repayment schedule, making it easier to manage your budget.
Buying a Second Property or Investment Property
HELOC:
Can be used to cover a down payment temporarily. But you need to be prepared to repay it or refinance quickly since it’s usually short-term.
Home Equity Loan:
Good if you know your down payment amount in advance. You get a fixed loan with steady payments and a clear interest rate, which helps with planning.
Timing and Market Conditions
Low Rate Environment:
A HELOC can be attractive at first because its variable rate is usually low, letting you save on interest.
Rising Rate Environment:
A fixed-rate home equity loan can help avoid payment shocks since your payments stay the same even if rates go up.
Combination Approach
Use Both:
Take a fixed home equity loan to cover your main costs. Keep a HELOC open as a backup for emergencies or extra expenses. When repaying, focus on paying off the part with the higher interest rate first to save money.
Eligibility and Qualification Requirements
Thinking about tapping into your home’s equity? Here’s what you need to qualify and how to know if you’re eligible.
Basic Eligibility Criteria
Minimum equity: often 20 percent for standalone HELOC or combined loan to value up to 80 percent
Credit score: prime lenders typically look for a score above 680
Income ratios: lenders check Gross Debt Service (GDS) and Total Debt Service (TDS) ratios
Documentation Needed
Proof of identity and residence
Income proof: pay stubs, tax returns, business financials
Mortgage statements and debt details
Property value evidence: appraisal or broker’s opinion
Bank statements for self employed borrowers
Lender Guidelines and Variations
Major banks, credit unions, monoline and private lenders each have their own criteria. Some offer programs for newcomers, self employed, or retirees. Alternative methods like bank statement underwriting exist but often at higher rates.
Role of Home Appraisal or Property Evaluation
You typically pay the appraisal fee up front. The value determines your maximum credit or loan amount. A well presented home may appraise higher, boosting available equity.
Impact of Existing Mortgage Type and Term
Breaking a closed mortgage term to add a second charge can trigger penalties. Timing applications around renewal can avoid those fees.
Co Borrower or Guarantor Considerations
Adding a co borrower can improve eligibility but adds their debts to your ratios. Guarantor arrangements require clear legal agreements.
Regulatory or Insurer Rules
Lenders follow OSFI and insurer rules on combined loan to value and debt service limits. Insured second mortgages are rare if equity is sufficient.
Preparing Your File for Best Chance of Approval
Check and correct credit report errors
Pay down small debts to improve ratios
Gather all documents before application
Work with a broker to ensure your file is complete
Costs and Fees Associated with HELOC and Home Equity Loan
Before you borrow, it’s important to understand the costs. Here’s a look at the common fees that come with a HELOC or home equity loan.
Interest Costs
HELOC: Variable rate (prime plus margin) on outstanding balance
Equity Loan: Fixed or variable rate chosen at outset
Upfront Fees
Appraisal or evaluation fee
Legal fees for mortgage registration
Possible application or setup fees
Ongoing Fees
Annual HELOC availability fee
Account maintenance fees
Penalties and Charges
Prepayment penalties on fixed equity loans if paid off early
Discharge and appraisal fees when switching lenders
Insurance Requirements
Mortgage default insurance not needed if equity is above threshold. Title insurance may be required by some lenders.
Tax and Accounting Considerations
Personal use interest is non deductible; investment use may be deductible. Keep clear records of how funds are applied.
Comparing Total Cost Scenarios
Run sample calculations: compare total interest on a $50,000 HELOC versus a $50,000 equity loan over similar terms to see which makes sense for your needs.
Managing HELOC and Home Equity Loan Responsibly
Borrowing against your home can be smart if managed well. Here’s how to stay on track and use your HELOC or home equity loan wisely.
Budgeting for Payments
For HELOC: plan to repay principal, not just interest. For equity loans: ensure fixed payment fits comfortably in your budget.
Monitoring Interest Rate Changes
Set up alerts for rate moves. If rates rise significantly, consider switching variable balance to a fixed loan.
Tracking Spending from HELOC
Keep clear records of draws. Avoid using the HELOC for non essential expenses.
Building Equity Back
Pay more than the minimum when possible. Avoid maxing out the line to preserve a cushion.
Communication with Lender or Broker
Have regular check ins on balances and rates. Seek advice if your financial situation changes.
Emergency Planning
Maintain a separate savings fund. Do not rely solely on HELOC for emergencies.
Impact on Future Mortgage Needs and Borrowing Capacity
Adding a HELOC or equity loan affects your debt ratios. Unused HELOC limit may be considered in capacity calculations. Plan to pay down balances before mortgage renewal or applying for a new loan to keep ratios healthy.
Risks and Considerations
Market risk: Falling home values reduce available equity
Interest rate risk: Variable rates can spike payments
Overleveraging risk: Borrowing too much strains finances
Lifestyle risk: Using equity for non essentials can delay wealth building
Regulatory changes: Tax or lending rules may shift over time
Exit strategy: Have a clear plan to repay borrowed funds
Combining HELOC and Home Equity Loan Strategically
Using both can balance flexibility and predictability. For example, take a fixed loan for a core renovation budget and keep a smaller HELOC for overruns or emergencies. Structure repayment by tackling the higher cost portion first.
Role of a Mortgage Broker versus Direct Lender
A broker like AJP Mortgage shops multiple lenders to find the best HELOC or equity loan fit. Brokers can negotiate fees, secure rate holds, and guide you through documentation and appraisal. They also provide ongoing support for rate changes and refinancing opportunities, services direct lenders rarely offer.
Real Life Examples or Case Studies
Want to see how a HELOC works in real life? These quick case studies show how homeowners used it smartly and what you can learn from their stories.
Home Renovation Case
A family draws $20,000 from a HELOC for initial renovation costs, repays $5,000, then draws again for the next phase. The flexibility keeps cash flow steady and interest costs tied to only what they borrowed.
Debt Consolidation Story
Another homeowner consolidates $30,000 in credit card debt into a fixed equity loan at 6 percent over five years. The predictable payment helps them budget and alerts them to avoid new high interest debt.
Emergency Funding Example
A sudden medical bill of $15,000 is covered by a HELOC. When income returns, the homeowner quickly repays principal to limit interest, demonstrating the line’s usefulness as a backstop paired with a separate savings emergency fund.
Investment Property Financing
An investor uses a $100,000 HELOC for a down payment on a rental. They pay interest only early on while rental income ramps up, then refinance part into a fixed equity loan for predictability.
Business Cash Flow Case
A freelancer relies on a $30,000 HELOC for slow seasons and takes a $50,000 equity loan for new equipment. Combining both keeps operations smooth and interest cost deductible.
Steps to Apply for a HELOC or Home Equity Loan
Thinking about using your home’s equity? Here are the simple steps to apply for a HELOC or home equity loan, from start to finish.
Assess Your Equity: Estimate current home value and mortgage balance.
Review Credit: Check your credit report and fix any errors.
Gather Documents: Proof of ID, income, existing mortgage statements, property details.
Contact a Broker or Lender: Compare rates, terms, and fees; brokers can streamline this.
Appraisal: Schedule an appraisal to confirm home value.
Submit Application: Complete forms accurately; disclose intended fund use.
Review Offers: Compare interest rates, fees, and flexibility. Negotiate terms.
Finalize Approval: Sign documents, register the mortgage or open the HELOC.
Access Funds Responsibly: Draw or spend as planned; track usage and payments.
Monitor and Adjust: Set reminders for rate reviews, payments, and refinancing opportunities.
Risks to Watch For
Before tapping into your home’s equity, make sure you know the risks. Here are the common pitfalls to watch for and how to stay protected.
Overborrowing for lifestyle expenses
Rate shocks on variable HELOC payments
Underestimating total borrowing costs including fees
Impact on future mortgage renewals if debt ratios rise
Always have an exit strategy and maintain an emergency savings buffer.
Tips and Best Practices
Looking to make the most of your HELOC or home equity loan? Here are some helpful tips and best practices to guide you.
Borrow only what you need and can repay
Use fixed loans for known costs and HELOC for variable needs
Keep separate emergency savings beyond HELOC
Review rates and refinance options annually
Work with a broker for tailored advice
Keep clear records of fund use for tax and budgeting
Role of AJP Mortgage in Your Equity Financing Journey
AJP Mortgage offers an initial consultation to understand your goals and financial picture. We assess your equity, compare lenders, negotiate rates and fees, coordinate appraisals, and guide you through documentation.
After funding, we provide ongoing support on rate changes, refinancing opportunities, and equity management as part of your long term financial plan.
Conclusion
Tapping into your home equity can help you renovate, consolidate debt, fund education, or invest.
A HELOC suits flexible, ongoing needs; a home equity loan works best for known, one time expenses. Planning, discipline, and professional guidance are key.
Gather your documents, review your equity, and reach out to our best mortgage brokers in Canada for a no obligation consultation. Use equity wisely to support your goals without putting your home at unnecessary risk.
