Debt Consolidation Using Home Equity in Canada: When It Works and When It Doesn't

Using your home equity to pay off credit cards and other high-interest debt can cut the interest rate you pay, but it turns unsecured debt into debt secured by your home. This page works through the numbers, the limits on how much you can borrow, the main risk, and the alternatives. It is part of WealthNorth’s refinancing and home equity guide.

The Financial Consumer Agency of Canada (FCAC) sums up the trade-off: consolidating high-interest debts into a lower-interest product may save you money, but it may extend your repayment period, costing more in interest over time, and if you keep the spending habits that caused your debt, you’ll accumulate more debt (FCAC, debt consolidation).

The interest math

Credit card rates are set by each issuer and printed on your statement. A variable HELOC rate is typically based on the lender’s prime rate, according to the FCAC, which uses prime plus 1% as its example. The examples below use an illustrative 20.99% card rate and a HELOC at the chartered banks’ prime rate of 4.45% (Bank of Canada, as of 2026-09-30) plus that 1%, which is 5.45%. Your own rates will differ.

A year’s interest on a balance

Paying off a balance at a fixed monthly payment

The time to repay a balance with a fixed payment is n = log(payment ÷ (payment − balance × monthly rate)) ÷ log(1 + monthly rate), with the monthly rate taken as the annual rate ÷ 12; total interest is about n × payment − balance.

Keeping the $900 payment, the HELOC saves about $12,801 of interest compared with the card. The 10-year loan, at an illustrative 6.5% with semi-annual compounding, has the smallest payment but costs $8,116 more interest than the HELOC paid down at $900 a month. The lower rate saves money only if the payments stay high enough to clear the balance.

Setup costs reduce the saving. The FCAC lists appraisal, title search, title insurance and legal fees for borrowing against home equity, and a refinance can add a prepayment penalty on your current mortgage. For a small balance, those costs can take up much of the interest saved.

Your options

Refinancing when your mortgage term ends avoids breaking the mortgage early; the renewal section covers the timing. HELOC vs refinance and the home equity loan guide compare the routes in more depth.

How much you can borrow and how lenders qualify you

At a federally regulated lender, two limits apply: the revolving part of a HELOC can't exceed 65% of the home's value, and everything borrowed against the home (the mortgage plus the HELOC, or a refinanced mortgage) can't exceed 80% of its value. HELOC room is therefore the lower of 80% of the value minus the mortgage and 65% of the value. Mortgage insurance can't take a refinance above 80%, except a refinance to build secondary suites that takes no equity out. The full limits are in the home equity guide.

The FCAC adds that you must pass a stress test to qualify for a HELOC at a bank. Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones.

Debt ratios matter too. For an insured mortgage, CMHC caps your housing costs at 39% of gross income (GDS) and your housing costs plus other debt payments at 44% (TDS); lenders set their own limits for uninsured mortgages. Card debt you keep counts against you. Unsecured lines of credit and credit cards count at a monthly payment of at least 3% of the balance. A $30,000 card balance counts as at least $900 a month in that test.

Your credit history affects the rate. The FCAC notes that a poor credit history may lead to higher interest rates, and that if you only qualify for a consolidation product with a higher rate than your current debts, consolidating will likely increase your debt.

The main risk: borrowing again

Paying off cards with a HELOC leaves the card limits open. The FCAC warns that if you keep the spending habits that caused your debt, you’ll accumulate more debt, and that if you keep borrowing from a line of credit, getting out of debt may be difficult. Someone who moves $50,000 of card debt to a HELOC and then runs the cards back up to $30,000 owes $80,000, now partly secured by the home.

Steps some borrowers take to avoid that:

• ask the card issuers to lower the credit limits, or close cards they don’t need;
• set up automatic HELOC payments above the interest-only minimum;
• build a budget and an emergency fund so a surprise expense doesn’t go on a card;
• ask the HELOC lender for a lower credit limit, which the FCAC suggests to avoid overspending.

Taxes

Interest on money used to pay off personal debt isn’t deductible. The borrowed money has to be used to earn income from a business or property, such as rent, interest or dividends; interest on money used for personal purposes isn't deductible. Borrowing to invest is a separate strategy with its own rules; using home equity to invest covers it.

Alternatives to using home equity

How to consolidate debt covers consolidation without home equity.

Related pages

• Home equity in Canada
• Home equity loans
• HELOC calculator
• Mortgage vs home equity loan vs HELOC
• Alternative mortgage lenders