HELOC vs. Mortgage: Differences and When to Use

Home Equity Line of Credit vs. Mortgage: Differences, Pros and Cons

A home equity line of credit is a second mortgage that functions as a revolving line of credit, while mortgages are primary loans used to buy or refinance property.

While both are loans associated with home ownership, home equity lines of credit and mortgages are distinct in ways that potential borrowers need to fully understand.

To help you decide which option is best for you in specific scenarios, here are key differences to know when considering a home equity line of credit vs. a mortgage.

	Home equity line of credit (HELOC)	Mortgage
What you can use it for	It’s up to you.	Home purchase.
Factors that affect what you can borrow	Your home’s value, remaining mortgage amount.	Your monthly income, other debts.
When you can access funds	You access funds as you need them, and you don’t need to use the full amount at once. This is also called revolving credit — similar to a credit card.	All funds are distributed upfront at the time of the home purchase.
Repayment options	Your interest rate is variable.	You can choose between a fixed or a variable rate.

How a home equity line of credit works

A home equity line of credit, or HELOC, lets you borrow against the equity you’ve accrued in your home.

Home equity is the difference between your home’s market value and what you still owe on your mortgage.

How much can you borrow with a HELOC? In Canada, you can borrow up to 65% of your home’s value through a HELOC.

How do borrowing and repaying work with a HELOC? A HELOC is a revolving line of credit, similar to a credit card. That means you’ll have a pre-approved limit, you can borrow against that limit at any time, and you repay the outstanding balance as you go. You’re able to keep borrowing from a HELOC over time, as long as you haven’t reached your credit limit and continue to make your minimum payments.

How does interest work? Most HELOCs have variable interest rates, like a credit card. In practice, that variable rate is often based on the bank’s prime rate plus an additional 0.5% to 2%. If the prime rate goes up, your HELOC’s rate will also rise. You’ll only pay interest on the HELOC funds you actually use.

Can you use a HELOC to buy another house? It’s possible. You can finance up to 65% of a home’s purchase amount with a HELOC. If you want to finance some of the remaining amount, you must use a fixed-rate mortgage. You can finance up to 80% of the home’s purchase price between a HELOC and a mortgage. In other words, at least 20% must be paid in cash.

What are the risks? Because it offers easy-to-access cash with flexible repayment terms, a HELOC can lead to significant debt. In fact, the Financial Consumer Agency of Canada[1] states that “HELOCs are the largest contributor to non-mortgage consumer debt, more than double that of either credit cards or auto loans.” Other financing options, such as a bank loan or line of credit, may be a better fit.

HELOC pros

Pay interest only on the amount you withdraw.
Borrow what you need and pay off the entire balance when you want to.
No prepayment penalty.

HELOC cons

Could lead to debt and overspending.
Interest rates could rise.
Missing payments could lead to the loss of your home.

Best Mortgage Rates in Canada

Compare Canada’s top mortgage lenders and brokers side-by-side and find out the best mortgage rates that will meet your need

Explore Now

How a mortgage works

A mortgage is a loan specifically designed to purchase, build on or refinance of a piece of real estate.

How much can you borrow with a mortgage? A mortgage is intended to cover most of a property’s price. As such, mortgage amounts are often much larger than HELOC amounts, which are limited by an existing home’s value.

How do borrowing and repaying work with a mortgage? Mortgage repayment terms are typically far less flexible than those of a HELOC. You receive all the funding upfront, and you’re expected to repay your mortgage over a long period, often 25 years or more. Mortgage repayment happens on a strictly defined schedule that’s decided by your lender, and there may be steep penalties for early repayment, depending on the type of mortgage.

How does interest work? When you get a mortgage, you can choose between fixed-rate options, where rates don’t change, and variable-rate options, where they can. When you renew your mortgage, your interest rate can change, and you can select new terms. For example, you could switch from a variable rate to a fixed rate.

Mortgage pros

Choice of a fixed or variable interest rate.
Predictable payment schedule.
Predictable payment amounts, if you choose a fixed-rate mortgage.

Mortgage cons

Locked into a mortgage contract.
Non-flexible payment schedule.
Could be penalized for early repayment.

Alternatives to a HELOC

Second mortgage

As the name implies, a home equity loan, or second mortgage, is a loan you take out on top of an existing mortgage. Unlike a HELOC, you can get a home equity loan for up to 80% of your home’s value.

Like a regular mortgage, home equity loan funds are paid as a one-time, lump-sum. Borrowers are required to make payments (that cover both interest and principal) on a set schedule. One of the main downsides of a home equity loan is that they tend to have higher interest rates than first mortgages. .

Reverse mortgage

If you’re over the age of 55, a reverse mortgage allows you to take out 55% of your primary home’s value. You can use the money for anything you want, including home repairs, debt repayment or medical expenses. You’ll only need to pay it back when you sell the property, or your estate will repay it after you die.

About the Authors

Kurt Woock

Kurt Woock started writing for NerdWallet in 2021 and has covered mortgages, cryptocurrency, electric vehicles and small business software. Prior to joining NerdWallet, Kurt worked for the Colorado Public Employees'…

Sandra MacGregor

Sandra MacGregor is a freelance writer who has been covering personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like…

DIVE EVEN DEEPER

12 Essential Tips for First-Time Home Buyers

Saving the right down payment, preparing for the mortgage stress test and looking for assistance programs are tips first-time home buyers can use to reduce stress and save money.

Kurt Woock

Hannah Logan