Looking to Tap into Your Home Equity?

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We help homeowners get the lowest rates for home equity loans, home equity lines of credit, refinancing, and other mortgage products.

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If you’ve built equity in your home, you might be exploring ways to use it for things like renovations, debt consolidation, or other financial goals. As an Ontario mortgage brokerage, we frequently help clients understand their options, and two of the most common are a Home Equity Loan and a Home Equity Line of Credit (HELOC).

While both allow you to borrow against your home’s equity, they differ significantly in how they’re structured, their interest rates, payment terms, flexibility, and risks. In this article, we’ll explain everything in clear, simple language—written at a grade 10 reading level—so you can make an informed choice. We’ll cover what each option is, how they work, and some Ontario-specific details, including loan terms and lender differences.

What Is a Home Equity Loan?

A Home Equity Loan is a way to borrow a fixed amount of money based on the equity in your home. Equity is the value of your home minus what you still owe on your mortgage. With this loan, you receive a lump sum—say, $50,000—when you’re approved. In Ontario, these loans typically come with a one-year term. At the end of that year, you have options: renew the loan with the same lender, convert it into a HELOC with a traditional lender, or blend it into your existing mortgage to spread out the payments over a longer period. You repay the loan with regular monthly payments that include both principal and interest.

This type of loan is often used for one-time expenses, such as home repairs, buying a car, or clearing high-interest debt. Because it’s secured by your home, the interest rate is usually lower than unsecured loans, and the fixed amount makes budgeting straightforward.

What Is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit (HELOC) operates differently. Instead of a single payout, a HELOC gives you a credit limit—perhaps $50,000—that you can borrow from as needed. It’s a revolving line of credit, so you can draw money, repay it, and borrow again, up to that limit. You only pay interest on what you use, not the full amount available.

In Ontario, HELOCs are valued for their flexibility, making them ideal for ongoing costs—like a multi-stage renovation—or unexpected expenses. However, your payments can fluctuate based on how much you borrow and changes in interest rates, which adds some uncertainty compared to a Home Equity Loan.

Structure: Lump Sum vs. Revolving Credit

The main difference here is how you access the money. A Home Equity Loan provides a one-time lump sum. You get the full amount upfront, and that’s all you have to work with unless you reapply later. This suits projects with a defined cost, like a new roof or a specific debt payoff.

A HELOC, by contrast, is a revolving credit line. You can borrow a little today, pay it back, and then borrow more later, as long as you’re within the limit. For example, if you use $10,000 and repay it, that $10,000 becomes available again. This makes it better for situations where your needs might change or stretch out over time.

Interest Rates: Fixed vs. Variable

Interest rates are another key difference, and they vary depending on the lender and loan position. For a Home Equity Loan in Ontario, the rate is typically fixed for the one-year term. This means your payments stay the same throughout that year, giving you predictability. At renewal, the rate might adjust based on market conditions or your new agreement.

HELOCs, however, depend on the lender type. If you get a HELOC from a major bank (like RBC or TD) in first position—meaning it’s tied to your primary mortgage—the interest rate is usually variable, tied to the bank’s prime rate. If the prime rate goes up, so does your interest cost. But if you get a HELOC in second position from a B lender (a smaller, alternative lender behind your first mortgage), it often comes with a fixed rate. For example, as of April 2025, second-position HELOCs from B lenders might start at 7.49%, locked in for stability. The trade-off is that fixed rates from B lenders are typically higher than variable rates from big banks when prime rates are low.

Loan Terms and Renewal Options

The term of a Home Equity Loan in Ontario is usually one year. When that year ends, you have a few options. You can renew it with the same lender, often at a new rate based on current conditions. Or, if your needs shift, you could convert it into a HELOC with a traditional lender for more flexibility. Another option is to blend it into your existing mortgage, combining the loan balance with your mortgage to lower monthly payments over a longer term, though this might increase total interest paid.

Most HELOCs in Ontario don’t have a set maturity date. Instead, they’re open-ended—once you’re approved for a credit limit, you can borrow from it, repay it, and borrow again as long as the account stays active and you meet the lender’s requirements. There’s no specific time when you’re forced to stop borrowing or pay it all off, though lenders might review your account periodically to ensure you’re still eligible. For example, a HELOC in second position from a B lender might come with stricter conditions or higher rates, but it still typically lacks a fixed end date. This ongoing nature makes it a long-term tool, as long as you manage it responsibly.

Payments: Predictable vs. Flexible

With a Home Equity Loan, your payments are fixed for the one-year term. You know exactly what you’ll owe each month, which includes both principal and interest. This consistency is great for planning, especially if you’re on a tight budget.

HELOC payments are less predictable. During the draw period, you usually pay only interest on what you’ve borrowed, which can keep costs low if you use it sparingly. But if you borrow more, or if variable rates rise (with a first-position HELOC), your payments increase. Once the repayment period starts, you pay both principal and interest, similar to a loan, but the amount depends on your balance. A fixed-rate HELOC from a B lender offers more payment stability, though at a higher starting rate.

Flexibility: One-Time vs. Ongoing Use

Flexibility is where these two really split. A Home Equity Loan is rigid—you get the money once, and that’s it. If your project costs more than expected, you can’t add to it without a new application. It’s best for clear, one-off needs.

A HELOC shines in flexibility. Need $5,000 now and $10,000 later? No problem—you borrow what you want, when you want, up to the limit. This makes it ideal for ongoing expenses or as a safety net. In Ontario, where home projects can stretch over months (think winter delays!), that adaptability is a big plus.

Risks: What to Watch For

Both options use your home as collateral, so there’s risk. With a Home Equity Loan, the fixed payments are manageable, but if you can’t pay, the lender can eventually foreclose. At the one-year renewal, if rates jump or your finances worsen, you might struggle to refinance or blend it affordably.

A HELOC’s risks tie to its flexibility. With a variable-rate HELOC from a major bank, rising rates can spike your costs, especially if you’ve borrowed a lot. With a fixed-rate HELOC from a B lender, the higher rate means more interest upfront, and if you max out the limit, repayment could strain your budget. Missing payments on either can put your home at risk, so it’s critical to borrow only what you can handle.

HELOCs from Major Banks vs. B Lenders

In Ontario, lender options affect both products. Major banks prefer HELOCs tied to your first mortgage, often requiring good credit (680+). If your credit’s lower, B lenders step in, offering second-position HELOCs or Home Equity Loans with more lenient terms—though at higher rates. Property location matters too; urban homes in Toronto might get better offers than rural ones in Northern Ontario due to market value and resale potential. Equity is king—lenders typically let you borrow up to 80% of your home’s value (minus your mortgage), but B lenders might cap it lower if your credit’s weak.

Choosing Between Home Equity Loan vs. HELOC

The decision between a HELOC and a home equity loan comes down to your financial needs and goals. Here are some scenarios to help you decide which product is best for you:

Reasons to Choose a Home Equity Loan:

You need a lump sum upfront for a major purchase, such as home renovations, debt consolidation, or a large one-time expense.

You prefer fixed monthly payments and interest rate stability for easier budgeting.

You want to borrow a specific amount and pay it off gradually over time with a predictable repayment schedule.

Reasons to Choose a HELOC:

You want ongoing access to funds, such as for ongoing renovations or emergency expenses.

You prefer flexible payments—for example, you want the option to make interest-only payments or pay down the principal when it suits your budget.

You’re comfortable with variable payments and the possibility of changing interest rates.

Both Home Equity Loans and HELOCs unlock your home’s value, but they serve different purposes. The loan’s lump sum and short term suit fixed plans, while the HELOC’s revolving nature fits evolving needs.

Need help? Feel free to reach out to our team with your questions!