A HELOC lets you borrow against home equity as a revolving line of credit, while a refinance replaces your mortgage with a new, larger one and gives you cash upfront. The better choice depends on how much you need, how you will repay it, and how much risk you can carry.
If you own a home in Canada and want to tap its equity, the two most common routes are a home equity line of credit (HELOC) and a mortgage refinance. A HELOC is a revolving credit line secured by your home, while a refinance replaces your existing mortgage with a new, larger one and gives you the difference in cash. Both can be useful, but they carry different costs, repayment rules, and risks.
| Feature | HELOC | Mortgage refinance |
|---|---|---|
| What it is | Revolving line of credit secured by home equity | New mortgage that pays off the old one and releases equity as cash |
| Interest rate | Usually variable, often tied to prime | Fixed or variable, depending on term |
| Repayment | Interest-only payments possible; principal optional | Amortized payments include principal and interest |
| Access | Borrow, repay, reborrow up to limit | One lump sum at closing |
| Costs | Setup, appraisal, annual fees possible | Appraisal, legal, discharge, prepayment penalty possible |
| Best for | Ongoing or flexible needs | Large one-time expense with a clear repayment plan |
| Main risk | Rate increases; slow principal repayment | Higher mortgage balance; prepayment penalty |
How a HELOC works
A HELOC is a secured line of credit registered against your home, often as a collateral charge. Once approved, you can draw funds, repay them, and draw again up to your limit. Some lenders combine a mortgage and HELOC in a readvanceable product, so as you pay down the mortgage, more room opens on the line of credit. The interest rate is usually variable and tied to the lender's prime rate, so your payment can rise when rates change. The Financial Consumer Agency of Canada notes that a secured loan is tied to an asset, and failing to repay can put that asset at risk. Lenders commonly limit a HELOC to 65% of your home's value, with total borrowing including your mortgage generally up to 80%, but rules and lender policies vary.
How a mortgage refinance works
A refinance pays off your current mortgage and replaces it with a new, larger mortgage. You receive the difference in cash at closing. The new mortgage has an amortization schedule, so every payment includes both principal and interest. You can choose a fixed or variable rate, and a term that fits your plan. If you break an existing fixed-rate mortgage early, you may owe a prepayment penalty, which can be significant. The FCAC's mortgage resources explain prepayment penalties and the refinancing process. Refinancing may also trigger appraisal, legal, and discharge fees.
Cost differences
Upfront costs differ. A HELOC may have a setup fee, appraisal fee, annual fee, or a combination. A refinance may involve an appraisal, legal fees, title insurance, and a discharge fee for the old mortgage. The biggest wild card is the prepayment penalty if you break a fixed mortgage early. Ongoing costs also differ. HELOC interest is usually variable, so it can rise or fall with Bank of Canada rate changes and lender prime rate decisions. A refinance can be fixed, giving predictable payments, or variable. Because a HELOC allows interest-only payments, the balance can stay high for years. A refinance forces principal reduction with every payment, which usually costs more monthly but builds equity faster.
Risk differences
A HELOC's main risk is that the rate is variable and the repayment is flexible. Flexible repayment is convenient, but it can lead to a cycle of interest-only payments and a balance that never shrinks. Lenders can also reduce, freeze, or cancel a HELOC if your home value drops or your finances change. A refinance risk is a larger mortgage balance and potentially a longer amortization if you reset the term. You also risk a prepayment penalty when you refinance, and you may pay more interest over time if you stretch the loan. Both options are secured by your home, so default can lead to losing it. If a co-signer or joint borrower is involved, lenders must provide certain disclosures; our guide to what a co-signer is explains the basics. Your credit history also matters, and the FCAC credit reports and scores page shows how lenders review it.
When a HELOC fits better
A HELOC can suit borrowers who need ongoing access to funds rather than a single lump sum. Examples include a staged home renovation, a bridge between income and expenses, or an emergency reserve. Because you can borrow, repay, and reborrow, you only pay interest on what you use. That makes a HELOC useful for short-term or unpredictable needs. It can also work if you expect a bonus or tax refund and want to repay quickly. The key is to have a clear plan to repay principal, not just interest. If you are consolidating debt, compare the HELOC rate to your current rates and consider using our loan payment calculator to test scenarios.
When a refinance fits better
A refinance can suit a large one-time expense, such as a major renovation, a debt consolidation, or a down payment on another property. It gives you a fixed repayment schedule and can lock in a predictable rate. If you want to force yourself to pay down the balance, a refinance does that automatically. It can also be simpler than managing a separate line of credit. However, if you are consolidating credit card debt, remember that you are moving unsecured debt into a secured loan. That can lower your interest rate, but it also puts your home at risk if you cannot repay. The Canada Mortgage and Housing Corporation offers homebuyer and homeowner resources that explain equity and mortgage basics.
Common mistakes
- Using a HELOC like income and making only interest payments for years.
- Refinancing without checking the prepayment penalty on your existing mortgage.
- Assuming your HELOC limit will always be available; lenders can reduce it.
- Consolidating credit cards with home equity but continuing to use the cards.
- Ignoring how higher rates would affect a variable-rate HELOC payment.
- Forgetting that both options are secured by your home and default has serious consequences.
- Not comparing total costs over the expected borrowing period, including fees and interest.
If you have damaged credit, a HELOC or refinance may be harder to qualify for, and alternatives may be limited. Our guide to bad credit loans in Canada covers some options, but be cautious about high-cost borrowing. For any secured borrowing, read the contract, ask about fees, and compare at least two lenders. Rates and terms vary by lender and province.