Home Equity Loan vs HELOC: Closed-End or Revolving Secured Borrowing

A home equity loan is closed-end borrowing: you receive a lump sum once and repay it on a fixed schedule. A home equity line of credit (HELOC) is revolving borrowing: the lender approves a limit secured against your home, and you draw, repay and draw again. The deciding factor is rarely the headline rate — it is whether your need is a single known expense or an ongoing, unpredictable one.

Closed-end versus revolving: the structural difference

With a closed-end home equity loan, you and the lender agree on an amount, a term and a repayment schedule before the money moves. Interest is calculated on a declining balance, and because the schedule is fixed, the loan is fully repaid by the end of the term. You cannot re-borrow what you have paid down unless you apply for new financing.

With a HELOC, the lender approves a maximum limit and registers a charge against your property. You draw from that limit when you need it, and as you repay, the available credit returns. The rate is usually variable — commonly quoted as a lender's prime rate plus or minus a margin — so the cost of carrying the same balance can change from month to month. Many HELOCs allow interest-only payments during a draw period, with principal repayment later; others set a minimum payment that includes a small principal portion. Both structures exist, and the contract states which one you have.

The practical consequence: a home equity loan gives you certainty about the payment and a defined end date. A HELOC gives you flexibility about timing but leaves both the rate and the ultimate total cost open.

Side-by-side comparison

Feature	Home equity loan (closed-end)	HELOC (revolving)
Advance	Lump sum at closing	Draws up to an approved limit, as needed
Rate	Usually fixed for the term	Usually variable, tied to a lender's prime rate
Payment	Set at signing; predictable	Varies with the balance and the rate
Repayment	Amortized; loan ends on schedule	Revolving; interest-only options may be available
Re-borrowing	Not available without a new application	Built into the product
Best suited to	A one-time cost with a known budget	Ongoing or unpredictable costs
Main risk	Fixed payments regardless of changes in income	Balance can sit unpaid for years while interest accrues

The regulatory limits on how much you can borrow

The size of either product is capped by rules that sit on top of the lender's own risk appetite. At federally regulated lenders, home equity lines of credit are generally limited to 65% of the appraised value of the property, with total secured lending against that property usually capped at 80%, according to the Financial Consumer Agency of Canada.

Those two ceilings work together. If your existing mortgage already consumes part of the 80% total, the lender applies the lower of the two constraints when calculating your available room. That is why "how much can I get" is never a fixed number: it depends on the appraisal, the outstanding mortgage balance and the lender's own policy. Provincially regulated lenders may apply different limits, so it is worth asking which regulator supervises the lender you are speaking with.

A three-question test for which one fits

Work through these in order rather than starting with rates.

1. Is the expense one time or repeated? A single renovation with a signed contract and a known budget suits a closed-end loan. A multi-year project paid in stages, or a business needing working capital in unpredictable amounts, suits a HELOC.
2. Do you know today what the total will be? If you can name the number, you can price a fixed-payment loan and know when it ends. If the number is a guess, a HELOC avoids paying interest on money you have not needed yet.
3. How disciplined will your repayment be? A limit that refills as you pay it down is a poor fit if you are likely to treat available credit as income. This is the most common way homeowners end up carrying a secured balance far longer than they intended.

Where a HELOC can cost more than expected

• Rate risk sits with you. A variable rate means the payment can rise without any change in your circumstances, and the benefit when rates fall is not guaranteed to be symmetrical.
• Interest-only minimums hide the problem. A low minimum can look affordable while the principal remains untouched, so years can pass without the balance dropping.
• Your home is the collateral. Secured debt carries the risk of enforcement against the property if payments stop — a materially different risk profile from unsecured credit.
• Limits can change. HELOC agreements commonly permit the lender to reduce, freeze or cancel available credit under conditions set out in the contract. Read those clauses before treating the limit as an emergency reserve.
• Setup costs attach. Appraisal, title search, registration and discharge fees vary by lender and province. Ask for the complete list in writing before you commit.

Qualification: equity alone is not enough

Having equity gets you in the door; income and credit history decide the rest. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% and apply a qualifying stress-test rate above the contract rate under Guideline B-20, as described by the Financial Consumer Agency of Canada. In effect, the lender tests whether you could still carry the payment if rates were higher than the one you are being offered.

One structural detail is worth knowing: Canadian fixed-rate mortgages are compounded semi-annually by law, which is why the effective annual cost of a quoted rate is slightly higher than dividing that rate by twelve would suggest. The same conventions surface when lenders compare a closed-end loan against a revolving rate.

How to compare home equity line of credit lenders

Compare the contract, not the marketing line.

1. Confirm who regulates the lender. Federally regulated financial institutions' consumer complaints are handled by the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders and each province has a consumer protection office. That determines where a dispute goes.
2. Ask how the rate is built: which index, what margin, and how often it resets.
3. Request the full fee schedule in writing, including appraisal, legal, registration and discharge costs.
4. Read the clauses covering limit changes, prepayment and default before signing.
5. If you are considering moving higher-rate debt onto a secured line, compare the total cost against leaving that debt where it is — and weigh the fact that you would be converting unsecured debt into debt secured by your home.

If your credit history is damaged

Secured borrowing still depends on a credit file. A consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first; a first bankruptcy stays on file for six years after discharge. Canada has two national credit reporting bureaus — Equifax Canada and TransUnion Canada — and a free copy of your report is available from each, which is the cheapest way to check for errors before you apply.

Payday loans are a separate and far more expensive market. Where a province operates a licensed payday lending regime, federal payday lending regulations cap the cost of borrowing at $14 per $100 advanced, and some provinces set a lower cap that takes precedence. Payday loans are generally up to $1,500 for a term of 62 days or less. Quebec does not license payday lending, which effectively prohibits the model there. The Criminal Code criminal rate of interest of 35% per year (s. 347) is calculated using a defined method that aggregates interest and certain charges, which is why payday lending has its own regime. Carrying payday debt while trying to qualify for secured credit generally works against you.

If you are weighing a consumer proposal or bankruptcy, note that only a licensed insolvency trustee can administer one, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. Decisions about debt restructuring, tax or the legal effect of a secured charge on your home depend on your individual circumstances and belong with a regulated professional who can review your actual file — not a general guide.

loanloon.ca is a matching service, not a lender. We do not make loans, set rates or make credit decisions, and we cannot tell you in advance what you will be approved for. The lowest rates on any secured product are only available to the most qualified applicants — those with strong credit, verifiable income and substantial equity — and the rate you are ultimately offered reflects your own file.

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• Financial Consumer Agency of Canada — mortgages — Financial Consumer Agency of Canada