What is a HELOC?

HELOCs provide revolving credit, so you can borrow money as you need it, up to a certain amount—usually a percentage of the value of your home. Most HELOCS have no fixed repayment schedule, although you will have to pay interest monthly. (In contrast, a home equity loan is a lump sum with a fixed repayment schedule for the full amount.)

Some HELOCs are tied to your mortgage, while others are standalone. If your HELOC is tied to your mortgage, your total debt—the outstanding mortgage principal plus the amount borrowed on your HELOC—can’t exceed 65% of your home’s purchase price or market value. As you pay down your mortgage, your HELOC limit will increase.

For a standalone HELOC, the limit is also 65% of your home’s purchase price or market value, but the amount of the loan is not connected to your mortgage.

How do lenders set the interest rate on a HELOC?

When you borrow money using a HELOC, you pay interest to the lender. Typically, the interest rate on a HELOC is variable. That means the cost of borrowing rises and falls based on the lender’s prime rate, which in turn is influenced by the Bank of Canada’s policy interest rate (also called the benchmark interest rate). The policy interest rate is currently 3.75%. A lender’s prime rate is the policy interest rate plus a percentage, and a HELOC interest rate is the prime rate plus a percentage, such as “prime plus 1.5%.”

Example: “The bank offered Kali a HELOC in addition to her mortgage. The HELOC’s interest rate was lower than the rate charged on her credit card balance, so she used the HELOC to pay for her new furniture.” 

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About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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