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The main difference between a HELOC and a mortgage is how you access and repay the money.
A mortgage usually provides a lump sum to purchase a home that you repay over an amortization period.
A home equity line of credit (HELOC) lets you repeatedly borrow against your home equity up to an approved limit and pay interest only on what you use.
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What Is a Mortgage?
A mortgage is a loan secured against a property.
Most people use a mortgage to cover part of the cost of buying a home. You make regular payments that typically include both principal and interest.
Mortgages can have fixed or variable interest rates and are usually paid down over an amortization period such as 20 or 25 years.
As you repay the mortgage principal, your ownership stake in the home generally increases.
What Is a HELOC?
A HELOC is a revolving line of credit secured by your home.
Instead of receiving one lump sum, you receive a credit limit that you can borrow from when needed. Once you repay money, you can usually borrow it again.
You only pay interest on the amount you actually use.
For example, if you have a $100,000 HELOC but borrow only $20,000, interest is charged on the $20,000 balance.
Most HELOCs in Canada have variable interest rates.
How Much Can You Borrow With a HELOC?
A HELOC allows you to borrow against equity you have built in your home.
In Canada, the HELOC portion can generally be up to 65% of your home's value. Your total borrowing secured against the home may generally reach up to 80% of its value when other secured borrowing, such as your mortgage, is included.
For a HELOC combined with a mortgage, you generally need at least 20% equity.
For a standalone HELOC, you generally need more than 35% equity.
How Is Repayment Different?
Mortgage payments are structured to gradually repay the debt.
Each payment typically goes toward:
Principal
Interest
A HELOC is more flexible.
Depending on the lender, your minimum payment may require you to pay only the interest or a combination of principal and interest.
Making only interest payments means the amount you originally borrowed does not decrease.
Are HELOC Interest Rates Higher Than Mortgage Rates?
HELOC rates are often higher than mortgage rates.
Most HELOCs have variable rates based on the lender's prime rate. Your borrowing cost can therefore increase when interest rates rise.
Mortgage rates may be fixed or variable depending on the mortgage you choose.
The trade-off is flexibility. A HELOC usually gives you much more freedom to borrow, repay and borrow again.
What Can You Use a HELOC For?
HELOC funds can generally be used for many purposes, including:
Home renovations
Emergency expenses
Debt consolidation
Education
Large purchases
Investment expenses
Unlike a mortgage used to purchase a home, you generally do not have to use HELOC funds for a particular expense.
Can You Have a Mortgage and HELOC at the Same Time?
Yes.
Many Canadian lenders offer products that combine a mortgage with a HELOC.
These are sometimes called readvanceable mortgages.
As you repay the mortgage principal, the amount of credit available through the HELOC may increase, depending on the product.
You can also have a standalone HELOC that is separate from your mortgage.
When Does a Mortgage Make More Sense?
A mortgage usually makes more sense when you need a large amount of money to purchase a property and want a structured repayment schedule.
It can also be easier to manage because your payments are designed to gradually reduce the debt.
When Does a HELOC Make More Sense?
A HELOC may make sense when you already own a home and want flexible access to some of the equity you have built.
For example, you might use a HELOC if you're completing renovations over several months and do not know exactly how much you will need.
Because you borrow only when necessary, you pay interest only on the amount you actually use.
What Are the Risks of a HELOC?
Your home secures the HELOC.
If you cannot repay the debt, the lender may ultimately take action against your property.
Other risks include:
Variable interest rates increasing your borrowing costs
Borrowing more because the credit is easily accessible
Reducing the equity you have in your home
Carrying the balance for years by making only interest payments
A HELOC should therefore have a repayment plan rather than being treated as additional income. (canada.ca)
HELOC vs. Mortgage: Which Is Better?
Neither is automatically better.
A mortgage is generally better suited to buying a home and paying the debt down over a structured period.
A HELOC is better suited to homeowners who already have sufficient equity and want flexible access to additional funds.
The key distinction is simple: a mortgage helps finance the property, while a HELOC lets you borrow against the equity you have built in that property.
About the author
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.
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