A home equity loan turns part of the equity in your home into a lump sum without selling. This guide covers how the loan works, how much a lender can advance, what the payments and setup cost, and how it compares with a HELOC and a refinance. It is part of WealthNorth’s refinancing and home equity guide.
What a home equity loan is
The Financial Consumer Agency of Canada (FCAC) describes a home equity loan this way (FCAC, borrowing against home equity):
| Feature | Home equity loan |
|---|---|
| How you get the money | A one-time lump sum |
| Interest | Charged on the total amount; fixed or variable, generally higher than on a mortgage |
| Repayment | Fixed amounts of principal and interest on a fixed term and schedule |
| Borrowing again | Not possible once repaid |
| Security | Your home |
The FCAC lists home equity loans separately from second mortgages, which are a second loan on your home with the same features as a mortgage; with either, you keep paying your first mortgage as well. If you can’t repay money borrowed against your home, the FCAC warns you may face serious consequences, like the foreclosure of your home.
How much you can borrow
Under the Bank Act, a bank's loan to buy, renovate or improve a home, or a refinance of such a loan, together with any mortgage ranking equal to or ahead of it, can't exceed 80% of the home's value. The limits are measured against the home's value, which the lender usually sets with an appraisal. This is a federal rule for banks; lenders outside federal regulation work under other rules, and alternative mortgage lenders covers that market.
Most a bank can lend = home value Γ 80% β everything already secured by the home
| Home value | Mortgage owing | 80% of value | Most a bank can lend |
|---|---|---|---|
| $400,000 | $300,000 | $320,000 | $20,000 |
| $600,000 | $350,000 | $480,000 | $130,000 |
| $800,000 | $450,000 | $640,000 | $190,000 |
| $1,000,000 | $500,000 | $800,000 | $300,000 |
The home equity calculator works through more examples, including the lower HELOC limit.
Payments and total interest
A home equity loan is repaid in fixed payments, so the payment and the total interest follow from the amount, the rate and the term. The examples use illustrative rates, not quotes, and compound interest semi-annually as on a fixed-rate mortgage; your lender’s rate and compounding set the real figures.
| Amount | Term | Rate | Monthly payment | Total interest over the term |
|---|---|---|---|---|
| $50,000 | 5 years | 6.5% | $976 | $8,577 |
| $50,000 | 5 years | 8% | $1,011 | $10,642 |
| $50,000 | 10 years | 6.5% | $566 | $17,866 |
| $50,000 | 10 years | 8% | $603 | $22,385 |
| $100,000 | 5 years | 6.5% | $1,953 | $17,154 |
| $100,000 | 10 years | 6.5% | $1,131 | $35,731 |
| $100,000 | 10 years | 8% | $1,206 | $44,769 |
For $50,000 at 6.5%, stretching the term from 5 to 10 years lowers the payment by $411 a month but adds $9,288 of interest. That is the trade-off the FCAC points to when it notes that consolidating debt into a longer loan may extend the repayment period, costing more in interest over time.
Qualifying
| What lenders look at | Details |
|---|---|
| Equity | Enough room under the limit above, set from an appraisal of the home |
| Ability to pay | 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 | 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. |
| Credit history | Each lender sets its own standard; the FCAC notes that a poor credit history may lead to higher interest rates |
The FCAC’s list for a HELOC, which is also secured by your home, gives an idea of the paperwork: before approving one, it says a lender may ask for proof that you own the home, your mortgage details (balance, term and amortization), a home appraisal, and a lawyer (a notary in QuΓ©bec) to register the home as collateral. How credit scores affect your mortgage rate covers the credit side.
Setup costs
The FCAC lists appraisal, title search, title insurance and legal fees for a home equity loan, and says you may have to pay a new mortgage loan insurance premium. Lenders and lawyers set their own fees, so a written estimate from each shows the full cost; the closing cost calculator section covers legal and title costs in more detail.
Is the interest tax-deductible?
Interest is deductible when the borrowed money is used to earn income from a business or property, such as rent, interest or dividends, whatever secures the loan; it follows the money's current use, which you must be able to trace, and it isn't deductible on money used personally, on money borrowed for an RRSP, TFSA or FHSA contribution, or on an investment that can only produce capital gains.| Use of the money | Interest deductible? |
|---|---|
| Renovating your own home | No: personal use |
| Paying off credit cards or other personal debt | No: personal use |
| Buying investments that can pay interest or dividends | Yes |
| Down payment on a rental property | Yes |
| RRSP, TFSA or FHSA contribution | No |
Using home equity to invest covers the record-keeping the deduction needs.
Home equity loan, HELOC or refinance
| Feature | Home equity loan | HELOC | Cash-out refinance |
|---|---|---|---|
| How you get the money | One lump sum | As needed, up to a limit | One lump sum |
| Rate | Fixed or variable | Variable for most HELOCs | Your new mortgage rate |
| Payments | Fixed principal and interest | Interest only or part principal, as the lender requires | New mortgage payments |
| Borrow again after repaying | No | Yes | Not usually; some lenders let you re-borrow prepayments |
| Bank limit | Combined limit above | HELOC limit for the revolving part, and the combined limit overall | Combined limit above |
| Your existing mortgage | Stays in place | Stays in place, or is combined with the HELOC | Replaced; breaking it mid-term can bring a prepayment penalty |
A home equity loan fits a single, known cost and suits borrowers who want a fixed repayment schedule. A HELOC suits spending spread over time but, as the FCAC notes, paying only the interest never pays off the loan. A refinance can bring a lower rate on the whole amount but means breaking the existing mortgage. For a small amount, an unsecured personal loan avoids putting the home up as security. Mortgage vs home equity loan vs HELOC and HELOC vs refinance compare them in more depth.
Risks
- Your home is the security. If you don’t repay, you could lose your home.
- Two payments. The loan payment comes on top of your mortgage payment.
- Less equity. Borrowing reduces your equity, which the FCAC says can affect your financial stability and limit your options if you want to sell.
- Falling home values. If prices drop, what you owe can approach or exceed the home’s value.
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 25, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- Canada Revenue Agency: Line 22100 β Carrying charges, interest expenses and other expenses
- Canada Revenue Agency: Income Tax Folio S3-F6-C1, Interest Deductibility
- CMHC: CMHC Refinance for Building Secondary Suites
- CMHC: CMHC Purchase
- CMHC: Calculating GDS / TDS
- Financial Consumer Agency of Canada: Home equity lines of credit
- Justice Laws (Canada): Bank Act
- Justice Laws (Canada): Eligible Mortgage Loan Regulations
- OSFI: Residential mortgage underwriting practices and procedures
- OSFI: OSFI exempts uninsured mortgage straight switches from the prescribed MQR andβ¦
- OSFI: Amendments to the minimum qualifying rate for uninsured mortgages