HELOC FAQs: Definitions and Basics in Canada
September 6, 2025
Feeling overwhelmed by the endless jargon around home equity lines of credit in Canada? You are not alone. Getting a HELOC to access your home equity is a major financial decision. This is why you must understand the definitions and basic mechanics of a home equity line of credit, so you can feel confident and informed throughout the process.
Our team at 360Lending created this three-part guide to cut through the noise and give you the foundational knowledge you need to borrow responsibly. This first part breaks down the essential Definitions and Basics of HELOCs.
Once you have a foundational understanding, you can explore our other guides on:
What Is a Home Equity Line of Credit (HELOC)?
A Home Equity Line of Credit (HELOC) is a secured, revolving credit facility that functions like a high-limit credit card, using your home's equity as collateral. You can borrow, repay, and reuse funds repeatedly up to a pre-approved limit. Crucially, you only pay interest, typically at a variable rate, on the specific amount of money you have actually borrowed, not on the total limit.
How Does a HELOC Work?
A HELOC works like a credit card with a higher limit and much lower interest rate, as it is a revolving line of credit secured by your home's equity. You can borrow, repay, and reuse funds up to a set limit (usually 80% LTV). Crucially, you only pay interest, typically at a variable rate, on the specific amount of money you have actually borrowed.
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.
How Much Can You Borrow With a HELOC?
You can typically borrow up to 65% of your home's appraised value through a HELOC, which serves as the hard cap on the revolving portion. However, this loan, when combined with your existing primary mortgage, cannot exceed 80% of your home's total value (LTV). If you are unsure how these limits apply to your home or what products are best, always consult a mortgage broker.
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.
What Happens When You Sell a House With a HELOC?
When you sell your house, the outstanding HELOC balance must be paid in full from the sale proceeds. This is because the HELOC is a lien (legal claim) registered against the property. The lawyer handling the sale will ensure the HELOC debt is settled after the primary mortgage is paid off but before you receive any remaining cash.
Can You Pay Off a HELOC Early?
Yes, you can pay off your HELOC in full at any time without penalty. Unlike closed loans, HELOCs are "open" credit facilities, meaning they allow you to make unscheduled lump-sum payments of any size—including the full outstanding balance—without incurring prepayment charges. This flexibility is a key benefit, allowing you to pay less interest overall.
How Do You Pay Off a HELOC?
The minimum monthly payment required is typically interest-only, which is often withdrawn automatically from your account. Any funds paid beyond that minimum amount are applied to the principal balance, reducing your debt and freeing up available credit. The balance can be paid in full at any time through a lump-sum payment or by incorporating the balance into a mortgage refinance.
What is the Monthly Payment on a HELOC?
The interest-only monthly payment of a HELOC is calculated by multiplying the outstanding borrowed balance by the annual interest rate, and then dividing the result by 12. This method gives you the required minimum payment, which is based only on the interest accrued that month. For more details, check out our HELOC calculator.
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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