A Home Equity Line of Credit (HELOC) is often the cheapest way to borrow for home renovations in Canada — but it’s not without risks. This guide helps you decide when a HELOC makes sense and when you should look at alternatives.
What is a HELOC?
A HELOC is a revolving line of credit secured against your home’s equity. Like a credit card, you can draw funds as needed, repay them, and draw again up to your limit. Interest is charged only on the amount drawn.
Key HELOC terms (Canada):
- Maximum HELOC limit: up to 65% of your home’s appraised value (standalone HELOC) or up to 80% combined loan-to-value when combined with a mortgage
- Interest rate: typically prime rate + 0.5% (variable) — roughly 5.2% in 2026 at current prime of 4.95%
- Repayment: interest-only payments are usually permitted; no mandatory principal payments on the revolving portion
Why a HELOC is popular for renovations
At ~5–6% interest, a HELOC is typically far cheaper than:
- Unsecured personal loan (7–12%)
- Credit card (19.99–22.99%)
- Renovation financing from a contractor (often 15–29%)
And unlike a home equity loan (a fixed-term second mortgage), you only pay interest on what you draw. If a renovation comes in under budget, you pay less.
When a HELOC makes sense for renovations
Strong candidates:
- You have at least 20% equity in your home
- The renovation adds value to the property (kitchen, bathroom, addition)
- Your income is stable and you can handle variable-rate exposure
- You plan to repay within 3–5 years
- You’ve compared rates and a HELOC is significantly cheaper than alternatives
Red flags — reconsider a HELOC if:
- Renovation is luxury or discretionary (outdoor hot tub, cosmetic updates) without clear value-add
- You’re already at high debt levels relative to income
- Your income is uncertain or variable (HELOC payments increase if prime rate rises)
- You’re within 5 years of retirement and would carry the debt into fixed-income years
The risk of using your home as collateral
The fundamental difference between a HELOC and an unsecured loan: your home secures the debt. If you can’t repay, the lender can force the sale of your property. This makes HELOCs serious obligations, not “free money from equity.”
Home values also fluctuate. If your home value drops after you’ve drawn on a HELOC, your equity cushion shrinks — and in rare cases, lenders may freeze or reduce a HELOC (they have the right to do so if your equity falls below requirements).
Alternatives to a HELOC for renovations
| Option | Typical rate (2026) | Notes |
|---|---|---|
| HELOC | Prime + 0.5% (~5.2%) | Cheapest; secured; variable rate |
| Mortgage refinance (cash-out) | ~4.5–5.5% fixed | Lower fixed rate; higher closing costs |
| Purchase plus improvements mortgage | ~4.5–5.5% | Roll reno cost into new mortgage on purchase |
| Unsecured personal loan | 7–12% | No home equity needed; higher rate |
| Credit card (0% promo) | 0% for 6–12 months | Useful for small renos if paid off in time |
| Canada Greener Homes Loan | 0% interest, up to $40,000 | For eligible energy efficiency upgrades |
| Contractor financing | 10–29% | Avoid unless 0% promo; very expensive otherwise |
Canada Greener Homes Loan
For energy efficiency upgrades (insulation, heat pump, windows, EV charger), the Canada Greener Homes Loan offers 0% financing up to $40,000 repaid over 10 years. This is almost always preferable to a HELOC for eligible projects.
Mortgage refinance vs HELOC
If you’re also up for mortgage renewal, it may make sense to refinance to a higher mortgage balance (cash-out refinance) rather than adding a HELOC. A fixed-rate mortgage may offer slightly lower rates than a HELOC and avoids variable-rate risk.
The downside: refinancing has closing costs (appraisal, legal fees — $1,000–$3,000) and breaks your existing mortgage term, potentially triggering a penalty. Compare the penalty plus costs against the interest savings.
Frequently asked questions
Can I deduct HELOC interest for a rental property renovation? Yes. If you use a HELOC to finance improvements to an income-producing property (rental unit, investment property), the interest may be deductible as a business or investment expense. The deductibility requires the loan proceeds to be directly traceable to the income-producing use.
Does a HELOC affect my mortgage stress test? When applying for a HELOC, lenders assess your ability to service the debt using the higher of the contract rate or 5.25% (stress test rate). A HELOC does not affect an existing mortgage stress test — it’s a separate application.
Can I get a HELOC if I still have a mortgage? Yes. Most HELOCs in Canada are set up as part of a readvanceable mortgage — as you pay down your mortgage principal, the HELOC limit automatically increases by the same amount. Total borrowing (mortgage + HELOC) cannot exceed 80% of the property’s value.
What’’s a good equity level before using a HELOC for renos? Financial planners often suggest keeping at least 20–30% equity as a buffer after drawing on a HELOC. If your home is worth $700,000 and your mortgage is $400,000, you have $300,000 equity. Drawing $100,000 for renovations leaves you at $200,000 equity (28.5%) — a reasonable cushion.