Who this is for: Homeowners with a one-time, known cost and enough equity who prefer fixed payments and a set end date to a revolving line of credit.
On this page
The phrase “home equity loan” sounds like a single product, but people use it for several things. In this guide it means what the Financial Consumer Agency of Canada means: a one-time lump sum borrowed against your home, repaid on a fixed schedule. It is a close relative of a second mortgage, and the difference is mostly in the name.
What a home equity loan is
You borrow a fixed amount once, secured by your home. The agency describes it as available up to 80% of your home’s value, with interest charged on the full amount. Once you repay it you cannot borrow the same funds again. Payments cover principal and interest on a set schedule, and the rate can be fixed or variable, generally higher than a regular mortgage.
That fixed shape is the whole point. You know the payment and you know the end date. A home equity line of credit works the other way: it revolves, it has a lower cap of 65% of value, and its rate is variable. If you want both side by side, the HELOC and second mortgage comparison sets out the differences.
When it makes sense
A lump sum suits a cost that arrives all at once and has a clear price: a roof replacement, a tuition payment, a one-time buyout of a partner or a family member, a deposit for a business purchase. When the amount is known, the lender can set the loan to match, and you avoid paying interest on money you are not using.
It also suits people who want discipline. A revolving line is easy to keep using. A loan with a payment schedule and a finish line is harder to drift on. If your concern is that you would draw a line down and leave it there, a fixed loan is the safer shape.
When it makes things worse
It makes things worse when the spending is uncertain or staged. The second worked example on this page shows how a lump sum costs more when part of the money sits idle. It is also a bad fit if you are borrowing to cover everyday bills. A fixed payment on top of an existing budget gap leaves less room to move each month.
It is a poor choice when the real need is smaller than the minimum a lender will write, or when the price of the loan is higher than the cost of the problem it solves. Borrowing $60,000 against the home to avoid a $3,000 bill makes no sense, even though the loan is available.
What it really costs
The cost is interest plus the fees that come with registering a new charge. The agency lists appraisal, title search, title insurance and legal fees as the administrative fees you can face when borrowing against home equity, and notes that you may need to pay a new mortgage loan insurance premium. Ask for each one as a dollar figure.
Also ask about the end of the loan. Paying off early may carry a charge, and when the loan is paid off the lender’s claim has to be discharged from the title. The agency says a discharge fee may be charged, and where the fee is not regulated it typically ranges from no charge up to $400, with lawyer, notary or commissioner of oaths fees typically between $400 and $2,500. Add those to your total.
The risk to your home
The agency’s wording is plain: your home acts as security for the equity you borrow, and you may face serious consequences, including foreclosure, if you cannot repay. A fixed payment does not flex when your income does. Before you sign, work out the payment against the worst month of the year, not the average one.
Equity also shrinks if the housing market falls, and it falls faster when you have borrowed up to the limit. If you borrow near the 80% cap and prices drop, you may owe more than a lender would now lend against the home, which can make a later refinance or sale harder.
What to try before borrowing
Look at what you already have. If you have unused prepaid amounts on your mortgage, the agency says you may be able to re-borrow prepayments you made during the term, usually added to your mortgage balance at the same or a blended rate. Ask your lender what it allows, and what it costs.
If your credit and income are strong, a bank line of credit may cost less. If the need is smaller, a personal loan avoids putting the home behind it. Saving for the cost, or phasing the project, may mean you borrow less or not at all. For debt trouble, a Licensed Insolvency Trustee can explain a consumer proposal and many do not charge for the first appointment, which is worth hearing before you put the house behind any new loan.
How the exit works
A home equity loan ends one of four ways: you pay it down on schedule, you refinance it into a new mortgage, you sell the home, or you pay it off from a lump sum such as an inheritance or a business sale. A fixed term loan will have a date, and a lender may offer renewal, though you should not count on it. If your plan depends on a refinance, ask what the new lender would need to see.
Plan the exit around what you can control. A payment plan that comes entirely from your income is easier to defend than one that depends on a house price or a refinance rate.
What to ask before you sign
- The full cost of borrowing in dollars for the term, with each fee shown.
- Whether the payment is interest only or includes principal, and what is owed at the end.
- What changes, if anything, to your first mortgage.
- The penalty, if any, for repaying early, and the discharge fee.
- The licence details of the professional arranging the loan, and how to confirm them with your provincial regulator.
If you would like to speak with a licensed mortgage professional in your province, you can check your options. You are free to say no, and the calculator is there to use first.
Room to borrow on a $640,000 home with $380,000 owed
Made-up figures, using the 80% of appraised value the Financial Consumer Agency of Canada gives as the usual maximum for a home equity loan, less the existing mortgage. A lender may set a lower limit.
- Appraised value
- $640,000
- 80% of that value
- $512,000
- Owed on the first mortgage
- $380,000
- Equity in the home
- $260,000
- Most a home equity loan could be
- $132,000
$640,000 x 80%
$640,000 minus $380,000
The cost of a lump sum when the money is spent in two steps
Made-up figures. A $50,000 loan at an assumed 10% is interest only for a year. Only $30,000 is needed now and the other $20,000 six months later. The staged comparison uses the same assumed 10%, though a line of credit would have its own rate and limit.
- Interest on the full $50,000 for a year
- $5,000
- Staged: $30,000 for twelve months
- $3,000
- Staged: $20,000 for six months
- $1,000
- Staged total
- $4,000
- Extra interest from taking it all up front
- $1,000
$50,000 x 10%
$30,000 x 10%
$20,000 x 10% x 6/12
Questions people ask
Is a home equity loan taxable income?
Borrowed money is a loan, not income, so receiving it is not taxed on its own. What the money is used for can change the tax picture of the interest, and the rules are specific. Ask an accountant before you assume the interest is deductible.
What does my lender do with my first mortgage?
The agency notes that a lender may change the terms of your original mortgage, and that you may have to pay a new mortgage loan insurance premium. Read the offer for any change to the first mortgage, and ask whether the new loan is registered behind it or replaces it.
Can I borrow the equity in stages?
A home equity loan pays out once, and interest runs on the full amount. If you need money over several months, a line of credit that you draw as you go is built for that, though it carries its own limit of 65% of value and a variable rate.
Do I get the money in my account at closing?
Funds are normally released through the lawyer handling the closing, once the loan is registered and any debts being paid off are cleared. Ask the lawyer how and when you will be paid, and what documents they need from you.
What happens to the loan if I sell the house?
It is repaid from the sale proceeds, behind the first mortgage, and then discharged so the lender's claim is removed from the title. Your lender may charge a discharge fee, and you should ask in advance whether early repayment carries a penalty.
How much equity do I actually have?
Equity is the appraised value of the home minus everything secured against it, including the mortgage and any line of credit. You may need an appraisal to know the true value, since online estimates and tax assessments can be far from what a lender uses.