“Home equity loan” and “second mortgage” are two of the most confusing terms in real estate finance, often used interchangeably. The truth is, one is actually a type of the other. The real choice you face as a homeowner isn't between a home equity loan and a second mortgage, but between the two main types of second mortgages: the fixed-term Home Equity Loan and the flexible Home Equity Line of Credit (HELOC).

This definitive explanation will compare these powerful financial tools, helping you decide which is right for your goals. As mortgage professionals, our team at 360Lending knows that choosing the correct product is critical, so let's explore the differences.

A Home Equity Loan Is Usually a Second Mortgage

Let's begin by clearing up the biggest point of confusion right away. A home equity loan is not a separate concept from a second mortgage; it is a specific product that falls under the second mortgage category.

"Second Mortgage" is a broad, legal category. It refers to any loan that is registered on your property's title in second position, meaning it sits behind your primary (or "first") mortgage. If you were to sell your home or default on your loans, the first mortgage lender gets paid back first from the proceeds, and the second mortgage lender gets paid back second. Because this second-position loan carries more risk for the lender, it typically comes with a slightly higher interest rate than a first mortgage.

So, the key isn't to choose between them, but to understand which type of second mortgage you need. In Canada, the two primary products are the Home Equity Loan and the HELOC. Understanding their fundamental differences is the key to structuring your finances correctly.

Deep Dive: Home Equity Loan (Term Loan)

A Home Equity Loan is the most traditional way to borrow against your home. It functions just like a classic installment loan, similar to a car loan, but secured by the equity you've built in your property.

How It Works

When you are approved for a home equity loan, you receive the full loan amount in a single, lump-sum payment. For example, if you're approved for a $100,000 home equity loan, you get a cheque or direct deposit for $100,000 right at the start. From that point on, you begin to pay it back over a set period of time (the amortization) with regular, consistent payments that include both principal and interest.

Key Features & Characteristics

Fixed Interest Rate: The vast majority of home equity loans come with a fixed interest rate. This means your interest rate and your payment amount are locked in for the entire term of the loan, providing perfect predictability.

Predictable Repayment Schedule: Because the rate and amortization are fixed, you know exactly what your payments will be each month and exactly when the loan will be paid off.

One-Time Access to Funds: Once you receive the initial lump sum, you cannot re-borrow the funds as you pay the loan down. If you need more money later, you would have to apply for a brand new loan.

The Pros

Stability and Predictability: The fixed home equity loan monthly payments make it incredibly easy to budget. You are protected from any future interest rate hikes from the Bank of Canada.

Forced Discipline: The structured repayment plan forces you to pay down the principal balance over time. It’s a disciplined approach to debt reduction, ensuring you are consistently building back the equity you borrowed.

Clear Purpose: It’s ideal for a single, large expense, which can prevent the temptation of using home equity for impulse purchases or ongoing lifestyle spending.

The Cons

Lack of Flexibility: Its greatest strength is also its biggest weakness. If you only need a portion of the funds now and the rest later, you can't do that—you take it all at once and start paying interest on the full amount immediately.

No Re-Borrowing: As you pay down the loan, you don't regain access to that credit. If another need arises, you're back to square one with a new application.

When to Use a Home Equity Loan

A home equity loan is the perfect tool for large, clearly defined, one-time expenses. It excels in situations such as:

Major Home Renovations: When you have a firm quote from a contractor for a big project like a kitchen remodel or a basement finishing.

Debt Consolidation: When you want to combine several high-interest debts (like credit cards or personal loans) into a single, lower-rate payment.

Post-Secondary Education: To pay for a child's university tuition in one lump sum.

A Down Payment on a Second Property: To access a fixed amount for a down payment on a cottage or investment property.

Learn more about home equity loans in Ontario

Check your eligibility in under 60 secs.

See How Much I Qualify For

Deep Dive: Home Equity Line of Credit (Revolving)

The Home Equity Line of Credit (HELOC) is the more modern and flexible cousin to the home equity loan. It does not function like a traditional loan but rather as a revolving line of credit secured against your property.

How It Works

When you are approved for a HELOC, a lender gives you a maximum credit limit based on your available equity. For example, you might be approved for a HELOC with a limit of $150,000. You can then draw funds from this limit as you need them—you can take out $20,000 today, another $10,000 next month, and so on. As you pay back the principal, that credit becomes available for you to use again, all without needing to re-apply.

Key Features & Characteristics

Interest Rate: HELOC interest rates from big banks are almost always variable, but stand-alone HELOCs in second position from alternative lenders usually have fixed interest rates.

Flexible Access to Funds: You can access your funds at any time, in any amount up to your limit, often through online banking, a special credit card, or cheques.

Interest-Only Payment Options: Many HELOCs allow you to make interest-only payments each month. While you always have the option to pay more towards the principal, the minimum required payment only covers the interest accrued.

The Pros

Ultimate Flexibility: This is the HELOC's defining feature. It's perfect for situations where expenses are ongoing or unpredictable. You only borrow what you need, when you need it.

Interest Savings: You only pay interest on the amount you have actually used. If you have a $150,000 limit but have only drawn $30,000, you only pay interest on that $30,000.

Reusable and Convenient: A HELOC is a standing financial tool. Once it's set up, it's always there for you to use for future opportunities or emergencies without the hassle of a new application.

The Cons

Interest Rate: The interest rates for a stand-alone HELOC in second position can sometimes be slightly higher than a home equity loan.

Temptation and Lack of Discipline: The ease of access can make it tempting to use the HELOC like a bank account, funding lifestyle expenses rather than investments. Furthermore, making only interest-only payments means you are not reducing the principal debt, and you could carry that balance for years.

When to Use a HELOC

A HELOC is the ideal tool for ongoing, unpredictable, or multi-stage expenses. It’s best for:

Multi-Stage Renovations: Where you need to pay contractors at different phases of a project.

An Emergency Fund: Having a HELOC with a zero balance can serve as a powerful, low-cost emergency fund.

Investing: For dollar-cost averaging into the stock market or for seizing real estate opportunities as they arise.

Business Owners: To manage fluctuating cash flow needs for their business.

Getting the Right Product for Your Purpose

As you can see, the decision is not about a home equity loan vs. a second mortgage, but about which type of second mortgage best aligns with your financial goals and personality.

Choose a Home Equity Loan when you need a fixed amount for a specific, one-time purpose and you value the stability and discipline of a fixed payment.

Choose a HELOC when you need ongoing, flexible access to funds for unpredictable expenses and you are disciplined enough to manage a big credit limit with a revolving balance.

The right choice is a critical part of a healthy financial plan. Navigating these options is where expert advice from a team like ours at 360Lending becomes invaluable. We can walk you through the pros and cons of each product in the context of your own situation, and then survey the entire market—including banks, credit unions, and alternative lenders—to find the specific product with the best rates and features for you.

Get Personalized Advice

with an Award-Winning Mortgage Broker

4.9 from 812 reviews

Schedule My Call