Short answer: a HELOC is a revolving line of credit against your home's equity, flexible, interest charged only on what you draw. A home equity loan (usually structured as a second mortgage) gives you a lump sum upfront with a fixed schedule. Neither is universally "better," it depends on whether you need flexibility or predictability.
How a HELOC Works
A home equity line of credit works like a credit card secured against your home: you're approved for a maximum limit, and you can draw funds as needed, repay them, and draw again, up to that limit, for as long as the HELOC stays open. You only pay interest on the amount actually outstanding, not your full approved limit.
- Variable interest rate, typically prime plus a set margin
- Interest-only minimum payments are common, though you can pay down principal anytime
- Most lenders cap a HELOC at 65% of your home's value (combined with any existing mortgage, up to 80%)
- Reusable: pay it down and the credit becomes available again
How a Home Equity Loan Works
A home equity loan gives you the full approved amount in one lump sum at closing, with a fixed interest rate and a set repayment schedule, similar to a traditional mortgage but registered as a second charge behind your existing mortgage.
- Fixed rate and fixed payment for the full term
- One-time lump sum, not reusable once repaid
- Predictable amortization schedule, easier to budget around
Which One Fits Your Situation?
- Ongoing renovation with staged costs: A HELOC lets you draw funds as each phase comes due, rather than borrowing the full amount upfront and paying interest on money sitting unused.
- One-time need with a known amount: A home equity loan's fixed payment can be easier to plan around, especially if you want rate certainty.
- Funding a rental property down payment: Many Ottawa investors prefer a HELOC's flexibility to draw exactly what's needed for each new purchase.
- Debt consolidation: A fixed-rate home equity loan can make sense if you want the discipline of a fixed payoff date, rather than the temptation to keep re-drawing a HELOC.
What Both Options Have in Common
Both let you access equity without breaking your existing first mortgage's rate or term, which matters if you locked in a great rate or would face a steep penalty to refinance. Both also require sufficient equity and typically a minimum credit score, and both are registered against your property, meaning they must be paid out (or assumed) when you sell.
Not Sure Which Makes Sense?
We compare both options against a full refinance so you see the real cost of each before deciding. Talk to Sean about your specific goal, renovation, investment, or debt consolidation.