Home Equity Loan FAQs: Definitions & Basics in Canada
September 6, 2025
Feeling overwhelmed by the endless jargon around home equity loans in Canada? You are not alone. Getting a loan secured by your home is a major financial decision. This is why you must understand the definitions and basic mechanics of a home equity loan, 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 home equity loans.
Once you have a foundational understanding, you can explore our other guides on:
What Is Home Equity and How Is It Defined?
Home equity is the portion of your home that you truly own, free and clear of debt. It is mathematically defined as the difference between your home's current market value and the outstanding balance owed on your mortgage. This asset grows over time as you make payments against the principal and as your property appreciates in value.
How to Calculate Your Home Equity?
To calculate your total home equity, simply subtract your outstanding mortgage balance from your home's current market value. For instance, a $500,000 home with a $300,000 mortgage has $200,000 in equity. Lenders will typically require a professional appraisal to confirm the property value.
What Is the Loan-to-Value (LTV) Ratio?
The Loan-to-Value ratio is a financial metric used by lenders to assess the risk of a secured loan, like a mortgage or home equity loan. Loan-to-value the percentage of a property's value that is financed, calculated as the total mortgage balance divided by the appraised property value. A lower LTV ratio indicates lower risk for the lender and greater equity for the homeowner.
Can You Access Home Equity Without Refinancing?
Yes, you can. The most common ways to access your home's equity without refinancing are through a Home Equity Line of Credit (HELOC) or a home equity loan. Both of these options allow you to borrow against your home's value while keeping your existing primary mortgage in place.
What Are The Different Ways to Borrow Against Your Home Equity?
There are three main ways to borrow against home equity in Canada: a Home Equity Line of Credit (HELOC), a home equity loan, or a cash-out refinance. A HELOC is a flexible, revolving line of credit. A home equity loan is a one-time lump-sum loan. A cash-out refinance replaces your existing mortgage.
How Much Can You Borrow Against Your Home in Canada?
In Canada, you can typically borrow up to 80% of your home's appraised value through refinancing, a home equity loan, or a HELOC. This 80% maximum is known as the Loan-to-Value (LTV) limit and includes all debt secured against the home, such as your existing first mortgage.
How to Use Your House as Collateral for a Loan in Ontario?
Using your house as collateral for a loan involves consulting a mortgage broker to choose the right product, such as a HELOC or Second Mortgage. The loan is secured by your home's equity, requiring a property appraisal to confirm its value. After the application and approval, a lawyer registers the lender's lien against your property's title before the loan funds are released.
What Is a Home Equity Loan?
A home equity loan is a type of second mortgage that allows a homeowner to borrow a single, lump sum of cash secured by the equity in their home. It is repaid over a fixed term with a fixed interest rate, making it ideal for one-time, large expenses like major renovations or debt consolidation.
How Does a Home Equity Loan Work?
A home equity loan works by providing you with a single, lump-sum payment that is secured by your home. You repay this amount in fixed monthly installments over a set period, similar to a traditional mortgage.
The loan itself is separate from your primary mortgage. This means you will have two separate loan payments each month: one for your first mortgage and a second for your new home equity loan.
Is a Home Equity Loan a Second Mortgage?
Yes, a home equity loan is generally considered a type of second mortgage. It is a separate loan secured by your home's equity that is legally subordinate to your primary mortgage. This means in case of default, the first mortgage lender is paid back entirely before the second mortgage lender receives any funds, which is why second mortgages often have higher interest rates.
What's the Difference Between a Home Equity Loan vs. HELOC?
A home equity loan is a lump-sum loan with a fixed interest rate and a set repayment schedule, ideal for a single, large expense. A HELOC (Home Equity Line of Credit) is a revolving line of credit with a variable interest rate, which allows you to borrow as needed and only pay interest on what you use.
What's the Difference Between a Home Equity Loan vs. Cash-out Refinance?
A home equity loan is a secondary debt that is registered as a second mortgage, leaving your original mortgage completely untouched. By contrast, a cash-out refinance is a replacement loan that pays off your existing first mortgage and issues a new, larger one. The key consequence is that refinancing resets the term and applies the current interest rate to your entire mortgage balance.
How Does a Home Equity Loan Compare to a Personal Loan?
A home equity loan is a secured debt that uses your home as collateral, allowing for larger borrowing limits and lower interest rates. A personal loan is unsecured, which carries higher rates and a smaller borrowing limit, as approval and the interest rate depend heavily on your credit score alone. This difference in security makes the home equity loan less risky for the lender.
What is the Monthly Payment on a Home Equity Loan?
The interest-only monthly payment of a home equity loan is calculated by multiplying the loan amount by the annual interest rate, and then dividing the result by 12. This method gives you the minimum required payment, as it covers only the interest accrued that month. For instance, a $50,000 loan at 9% interest is about $375 per month. The full amortized payment, which includes principal, is a more complex calculation.
Can You Pay Off a Home Equity Loan Early?
Yes, you can pay off a home equity loan early, but it depends on the product. "Open" loans (like HELOCs) have no penalty. Most term loans are "closed" and charge a small prepayment penalty. Majority of borrowers repay the home equity loan balance by refinancing with a traditional bank near the maturity date.
What Are Common Uses for a Home Equity Loan?
Common uses for a home equity loan include debt consolidation, home renovations, paying for major life expenses such as education or medical bills, and making large purchases like a vehicle.
Home equity loans are especially useful for one-time, significant expenses where you need a predictable, large infusion of cash. The fixed rate and fixed term make it easy to budget for the repayment over time.
Are Home Equity Loans Tax-Deductible in Canada?
In Canada, the interest on a home equity loan is not tax-deductible for personal use. However, it may be tax-deductible if the funds are used for a qualified investment or to generate income from a business or rental property.
This is a key consideration for borrowers. While the interest on a home equity loan is not tax-deductible if you use the funds for a car or a vacation, the rules are different if you use the money for an investment property or a business. Always consult with a financial advisor to understand the tax implications of your specific situation.
Home Equity Loan Definitions & Basics in Canada
This guide has provided a foundational understanding of home equity loans. To learn more, explore our other comprehensive guides on Home Equity Loan Requirements & Lenders and Home Equity Loan Costs, Benefits & Uses.
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