Thinking about putting your home equity to use? If you’re like a lot of Canadians, you might be thinking about HELOCs – a great way to borrow money and get something from your home equity without having to sell.

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While HELOCs are popular – our total outstanding debt reached $212 billion in 2023 (279% more than all auto loans and 208% more than all credit card debt) – they aren’t faultless.

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If you’re considering a HELOC or are researching ways to borrow money more generally, you should know about the good, the bad and the ugly when it comes to HELOCs. Like any financial product, there are risks involved and outcomes you want to avoid.

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This article should lay it all out, simply and honestly, for you to make a decision.

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What is a HELOC?

A HELOC is a way of borrowing money, using your home as a guarantee for the debt. It’s different from mortgages and other popular loans because it’s a revolving line of credit, rather than paying you a lump sum upfront.

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By ‘revolving credit’, we mean you can draw from it and repay it over a long period of time. It’s similar to the way a credit card or overdraft works – it’s open and valid whether you’ve drawn down $1 or $50,000.

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We’ve written the ultimate guide to understanding HELOCs and how they work, if you want more detail.

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The pros & cons of HELOCs

You’ll never find a financial product that is all upside – there are positives and negatives to every choice. We want to give you a balanced view of why HELOCs can be great and where their issues lie, so you can make a decision grounded in facts and reality.

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Pros of HELOCs

HELOCs are popular and widely used in Canada. According to the Canada Mortgage and Housing Corporation’s 2024 data (data 21), HELOCs are the second-largest contributor to household debt in Canada (8.65%).

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They’re popular for a reason, as we’ll explain in the sections below.

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Access to large amounts of funds

One of the most attractive things about HELOCs is the amount of money they can unlock for borrowers.

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By using your home equity as a security for the loan, lenders are able to offer sums that you wouldn’t get close to with a personal loan or credit card. If you need a lot of cash,
HELOCs should be high on your list.

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Flexibility in use

The revolving nature of HELOCs gives you ultimate flexibility in how you access your funds and when.

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The same HELOC you use to pay for a home renovation project could also be used to pay for a family holiday a decade later. A single HELOC can work like multiple loans, if you manage it properly.

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Potential tax benefits

The interest owed on your HELOC can be tax deductible if you use your funds for certain business or property investments.

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The laws around HELOCs and tax deductions are quite particular, so you should discuss your situation with a tax advisor or other financial professional before making any commitments. You can also read Income Tax Folio S3-F6-C1 to see the wording of the CRA’s policy.

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Lower interest rates

Interest rates on HELOCs are generally lower than credit cards or personal loans. As an example, borrowing $10,000 using a HELOC could be cheaper overall than borrowing the same amount with a personal loan.

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You (and your lender) need to know what you can afford in repayments before agreeing to any loan or line of credit. As a result, lower interest rates can help you access more money than you would with other loans or credit facilities.

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Cons of HELOCs

We’ve explained all the positives, but it’s important you keep reading to get the full picture. For all their merits, HELOCs also carry risks and challenges that make them a poor choice for some borrowers.

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As with most financial decisions, there are no absolutes. Every borrower is unique and you need to do the research yourself to work out what suits your situation best – that could be a HELOC, but maybe not if you feel worried about these risks.

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Risk of losing your home

If you take out a HELOC, you use your home equity to guarantee the debt. As a result, you put your home at risk of foreclosure if you can’t make your repayments.

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To put it simply: you’ve promised the lender you’ll pay them back and, if you can’t, they can sell your home to recoup what they’re owed.

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This is why you have to be sure you can afford to repay your HELOC – including all the interest you will accrue – before committing to the debt.

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Variable interest rates

We did mention lower interest rates in the pros section, but there is another side to this. HELOCs are almost always sold with a variable interest rate, meaning the rate can go up or down depending on wider economic conditions.

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If interest rates spike, your repayments would follow. You need to know you can afford your repayments at a higher rate, not just the one offered at the start of your loan.

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Fees and closing costs

Setting up a HELOC isn’t as simple as applying and sealing it with a handshake. There’s a lot of administrative work that goes on and lenders have their own fees and costs, too.

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In arranging your HELOC, you might have to pay closing costs, admin fees, your own legal fees and an appraisal or valuation fee. You might also face a discharge fee at the end of your loan or repayment penalties if you choose to repay ahead of schedule. To budget for costs, put aside as much as 5% of the value of your loan.

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Impact on credit score

A HELOC is no different to any other debt: it will impact your credit score.

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• If your credit score is below 660 (the bottom limit of what Equifax considers ‘good’), you might harm your credit.
• If your credit score is a little above 660, you might limit your future borrowing.
• If your credit score is closer to 760 or above, you might not notice a big impact.

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Your credit score can also impact the amount you can borrow or the interest rate you’re offered.

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Comparing Home Equity Lines of Credit to other financial options

HELOCs aren’t the only way to borrow money, of course. In fact, they’re not even the only way you can use your home equity to borrow money!

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Consider some of these other options if you’re still on the fence about HELOCs.

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Reverse mortgages

Reverse mortgages are growing in popularity for Canadian seniors. They use your home equity as a guarantee (the same way a HELOC does), but work in a very different way.

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A reverse mortgage from Bloom pays you a lump sum based on a percentage of your home’s value, but is only due for repayment when you leave your home. You don’t give up ownership of any of your equity, nor do you have to make any repayments. Plus, you get to keep any appreciation in the value of your home when it is eventually sold.

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We’ve written a more detailed comparison of HELOCs vs. reverse mortgages, if you want to learn more.

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Selling the home

If you want to access the biggest amount of cash possible, with the fewest strings attached, then selling your home is the way to go.

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Of course, you need to account for ongoing housing costs – whether that’s choosing to downsize, or renting. There are also tax obligations to consider, as well as what it means for your estate.

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Traditional mortgage refinance

A mortgage refinance can be a great way to turn your home’s appreciated value into cash. If you’ve lived in the same home for a decade or two, it’s likely to be worth a fair bit more than when you bought it.

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Remortgaging your home can be another great way to get a significant cash sum in your checking account, but you will have to account for the cost of repayments and the risk of foreclosure.

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Who should consider a Home Equity Line of Credit?

Looking at the pros and cons together, it’s clear that HELOCs are a good choice in some situations. For others, they might not be right.

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Thinking about the pros of HELOCs, ideal candidates and situations could include:

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• Homeowners who have built up a lot of equity
• Consolidating debts with much higher interest rates
• Anyone undertaking a multi-phase home renovation project
• Borrowers with a good credit score and a low debt-to-income ratio
• People with multiple reasons to borrow money in the next few years

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It’s not advisable to use a HELOC to:

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• Invest in stocks and shares
• Borrow for fanciful or trivial reasons, given the risk of foreclosure
• Overextend your finances (either in taking on too much debt or struggling to make repayments)

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Frequently asked questions about Home Equity Lines of Credit

Understanding HELOCs can seem complicated at first, but once you get clear on the basics, it can be a lot simpler. We’ve answered some of the most common questions about HELOCs below, to give you a headstart.

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What are the eligibility requirements for a HELOC?

Every lender is different, but common requirements include:

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• A healthy credit score (e.g. 660 or above)
• At least 20% equity in your home to borrow against
• A low debt to income ratio (i.e. lots of room in your budget to afford repayments)

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Can you pay off a HELOC early without any penalties?

Yes, many lenders allow prepayments without penalties. You’ll need to check the fine print of your contract, but it’s common for lenders to allow early repayment on a HELOC.

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Are there tax benefits associated with a HELOC?

Most borrowers won’t see any tax benefits from opening a HELOC, but there are some situations where the interest can be deductible.

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If you use your HELOC to fund investments in a business or property, you might be able to deduct the interest on your loan from your tax bill. You should speak to a tax advisor to confirm if this is possible for your specific situation.

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How does a HELOC differ from a traditional home equity loan?

The main difference between a HELOC and a home equity loan is how the money is delivered to you. A HELOC is a revolving credit facility that you can draw from when you need, while a home equity loan pays you a lump sum at the start of the loan.

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It’s not an exact comparison, but you can think of a HELOC as a credit card and a home equity loan as a loan.

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HELOCs are popular, but they aren’t your only choice

HELOCs are widely used in Canada, with the total balance owed across the country being 2.79x all auto loans and 2.08x more than our credit card debt.

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Despite their popularity, they aren’t right for everyone. From risks with repayments and foreclosures to variable interest rates and the limits of your own equity, HELOCs shouldn’t be seen as fit for all situations.

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There are other options out there for Canadians of all ages. For over 55s, reverse mortgages might be one of the most attractive.

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Get a reverse mortgage estimate today.

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