How a HELOC Works in Canada: Limits, Risks, and Smart Uses

A HELOC (Home Equity Line of Credit) is not a one-time lump-sum loan. It is a revolving line of credit secured by your home. The lender approves a limit, you draw down and repay within that limit as you go, and you pay interest only on the amount you have actually used — similar in logic to a credit card, but at a far lower rate because your property backs it.

According to FCAC, most HELOCs carry a variable interest rate tied to the lender’s prime rate plus a margin. FCAC’s own example: if prime is 5.85% and your HELOC is “prime plus 1%,” your effective rate is 6.85%. When prime moves, your carrying cost moves with it.

The 65% and 80% Lines

This is the regulatory backbone of every HELOC. Under OSFI’s Guideline B-20 (in force since 2012), federally regulated lenders cap the maximum loan-to-value (LTV) on a standalone HELOC at 65%. On a home appraised at $1,000,000, a standalone HELOC tops out at a $650,000 limit.

So where does 80% come from? According to FCAC, if you combine a HELOC with a traditional amortizing mortgage, your total borrowing can reach 80% of the home’s value. But OSFI is explicit: any amount above 65% must be amortizing and non-readvanceable — principal you pay down on that portion cannot be re-borrowed. In plain terms, the first 65% can behave like a flexible revolving line; the slice between 65% and 80% behaves like an ordinary mortgage you steadily pay off.

The “flexibility” of a HELOC is exactly where the danger hides. Each month you can pay interest only and leave the principal untouched. That feels easy, but the balance never shrinks while interest keeps compounding at a variable rate. FCAC research found that more than a quarter of HELOC holders pay mainly interest-only, roughly 40% do not make regular principal payments, and many do not repay their HELOC in full until they sell the home. FCAC also reports that over 3 million Canadians hold a HELOC, owing an average of about $65,000. If rates climb or home values soften, that interest-only debt is amplified — which is precisely why FCAC has repeatedly warned that HELOCs can put consumers’ financial well-being at risk.

HELOC vs Refinance vs Second Mortgage

• HELOC (revolving line): Draw and repay as needed, pay interest only on what you use, usually at a variable rate (prime plus a margin). Best when the amount is uncertain, used in stages, and you want to keep flexibility.
• Refinance (redo the mortgage): Replace your existing mortgage entirely and pull out equity as a lump sum, often with a fixed rate you can lock in. Best when you need a defined sum and want a stable payment — though it may trigger a prepayment penalty.
• Second mortgage: A new loan stacked on top of your existing first mortgage. According to FCAC, second-mortgage rates are usually higher than first-mortgage rates because they carry more risk for the lender. Typically a fallback when the first two routes don’t fit.

There is no single “best” — only the one that matches your use case and cash flow. Fixed amount with a stable payment leans toward a refinance; variable amount with flexibility leans toward a HELOC.

• Generally smart: Funding something that creates value or a return — a value-adding renovation, consolidating high-interest debt (swapping 20% credit-card debt for a 6%–7% HELOC), or short-term bridge financing with a clear repayment plan. The common thread is a defined path to paying down the principal.
• Generally risky: Using a HELOC for everyday spending, vacations, or a car — things that depreciate or get consumed — while paying interest only. The principal never falls, and you are slowly spending your home’s equity away.
• Never forget: A HELOC is secured by your home. The consequence of not keeping up is not a credit-card collections call — it can put your housing itself at risk. Before you draw, know how it gets repaid, over what timeline, and whether you can still carry it if rates rise.

On qualifying: according to FCAC, getting a HELOC at a bank generally requires at least 20% equity in your home and passing a stress test — proving you can still afford payments at a higher qualifying rate.

Q: How much can you borrow with a HELOC in Canada?

A standalone HELOC lets you borrow up to 65% of your home’s value. Combined with a traditional amortizing mortgage, total borrowing can reach up to 80% of the home’s value, but the portion above 65% must be amortizing and non-readvanceable. Source: FCAC, OSFI.

Q: What is the risk of making interest-only payments on a HELOC?

A HELOC lets you pay only the interest each month, leaving the principal untouched. FCAC research found more than a quarter of holders pay mainly interest-only, and roughly 40% do not make regular principal payments, often not repaying until they sell. The principal never shrinks while interest keeps accruing, magnifying risk if rates rise or home values fall. Source: FCAC.

Q: What is the difference between a HELOC, a refinance, and a second mortgage?

A HELOC is a revolving line you draw and repay as needed, with interest charged only on what you use, usually at a variable rate (prime plus a margin). A refinance replaces your entire mortgage and pulls out equity as a lump sum, often at a fixed rate. A second mortgage stacks a new loan on top of your existing one and usually carries a higher rate because it is riskier for lenders. Source: FCAC.

Q: What do you need to qualify for a HELOC?

To get a HELOC at a bank you generally need at least 20% equity in your home and must pass a stress test, proving you can afford payments at a higher qualifying interest rate. Source: FCAC.