HELOC FAQs: Definitions and Basics in Canada

A Home Equity Line of Credit (HELOC) is a powerful financial tool that allows you to leverage the value of your home. As an award-winning mortgage brokerage with over 2,000 five-star reviews since 2015, 360Lending has created this comprehensive three-part FAQ to guide you.

This first section breaks down the Definitions and Basics of a HELOC. Some of the questions below link to a more in-depth article, giving you the option to dive deeper into the topics that matter most to you.

When you're ready, explore our other guides on HELOC FAQs: Requirements and Lenders and HELOC FAQs: Costs, Benefits & Uses to continue your journey.

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

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in your home. It allows you to borrow money as you need it, up to a pre-approved limit, and you only pay interest on the amount you actually use.

Unlike a traditional loan that provides a lump sum, a HELOC functions much like a credit card, where your available credit is replenished as you pay down the balance. It is a flexible tool for accessing the value you've built in your home.

How Does a HELOC Work?

A HELOC works in two phases: the draw period and the repayment period. During the draw period (typically 5-10 years), you can withdraw funds as needed and make interest-only payments. Once the draw period ends, you enter the repayment period, where you can no longer withdraw funds and must make monthly principal and interest payments until the balance is paid off.

This two-phase structure gives borrowers significant flexibility during the initial years. It's a popular choice for financing ongoing expenses like home renovations or paying for a child's education, as you only use funds and incur interest as the costs arise.

Is a HELOC a Secured Loan?

Yes, a HELOC is a secured loan. It is secured by the equity in your home, which serves as collateral for the lender.

Because the loan is secured by a valuable asset, lenders view it as a lower risk compared to unsecured loans (like a personal loan or a credit card). This is why a HELOC typically has a significantly lower interest rate and higher borrowing limit than an unsecured line of credit.

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What Is the Difference Between a HELOC vs. Home Equity Loan?

The main difference lies in how you receive the funds. A HELOC is a revolving line of credit with a variable rate, while a home equity loan is a lump sum with a fixed rate.

A home equity loan is more suitable for a single, large expense where you know the exact amount you need upfront. A HELOC is ideal for ongoing, unpredictable expenses where you need flexible access to funds over a period of time.

What's the Difference Between a HELOC vs. Second Mortgage?

A HELOC is a type of second mortgage. The term "second mortgage" refers to any mortgage loan that is subordinate to your primary mortgage. Both HELOCs and home equity loans are considered second mortgages because they are secured by your home after the primary mortgage.

The key distinction is in the product itself: a HELOC is a line of credit, whereas a traditional second mortgage (also known as a home equity loan) is a lump-sum loan.

How Is a HELOC Different vs. Personal Line of Credit?

A HELOC is a secured line of credit using your home as collateral, while a personal line of credit is typically unsecured.

Because a personal line of credit has no collateral, it poses a higher risk to the lender. As a result, personal lines of credit have significantly higher interest rates and lower borrowing limits compared to a HELOC.

How Does a HELOC Affect My Mortgage?

A HELOC does not directly affect the terms of your primary mortgage. Your mortgage payment, interest rate, and repayment schedule will remain the same.

A HELOC is a separate loan that is simply registered against your home's title. You will be responsible for two separate payments each month: your primary mortgage payment and the interest-only or principal-and-interest payments on your HELOC balance.

How Do You Pay Off a HELOC?

You can pay off your HELOC at any time without penalty. The minimum monthly payment is interest-only, but any amount you pay above that minimum goes directly toward the principal. You can pay off the entire balance in a lump sum or through a refinance.

The ability to pay off your HELOC at your own pace is one of its key benefits. Making additional payments reduces your overall interest costs and frees up more credit for you to use when you need it.

Can You Pay Off a HELOC Early?

Yes, you can pay off a HELOC early without penalty. Unlike many fixed-term loans, most HELOCs allow you to make large lump-sum payments or pay off the entire balance at any time without a prepayment penalty.

This flexibility is one of the key benefits of a HELOC. It gives you the freedom to borrow and repay on your own terms, and you will only ever pay interest on the money you use.

What Happens When You Sell a House With a HELOC?

When you sell a house with a HELOC, the outstanding balance on the line of credit must be paid in full from the proceeds of the sale.

The HELOC is a lien on your property, and it is a legal requirement that all liens be settled before the new owner takes possession. The lawyer handling the sale will ensure the HELOC balance is paid off after the primary mortgage, and any remaining proceeds from the sale will be given to you.

Can You Get a HELOC from a Different Bank?

Yes, you can get a HELOC from a different bank. It is a common practice to take out a HELOC with a different lender than the one who holds your primary mortgage. This often happens if the new lender offers a more competitive rate or better terms for the line of credit.

The process is straightforward: the new lender will register a second mortgage against your home's title to secure the HELOC. The lien is subordinate to your primary mortgage, which remains in place with your original bank. This allows you to shop around for the best deal on your line of credit without affecting the terms of your first mortgage.

Can You Increase Your HELOC Limit?

Yes, you can increase your Home Equity Line of Credit (HELOC) limit, but it requires a full re-qualification. The process is similar to a new loan application. Your lender will require you to re-qualify, which means they'll re-evaluate your finances and your home's current value.

To increase your HELOC limit, lenders will typically assess:

Income and Debt-to-Income (DTI) Ratio: Lenders need to confirm your income and DTI can support a higher potential credit limit.

Credit Score: Your credit history must still be in good standing.

Home Equity: A new appraisal may be required to verify your home's value has increased, providing more equity to borrow against.

HELOC Definitions and Basics in Canada

This guide has provided a foundational understanding of Home Equity Lines of Credit. To learn more about how to qualify and find a lender, explore our guide on HELOC Requirements and Lenders. For a breakdown of costs, benefits, and common uses, visit our guide on HELOC Costs, Benefits & Uses.

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