HELOC (Home Equity Line of Credit)

A HELOC is a revolving line of credit secured against your home equity. It works like a credit card: you are approved for a maximum limit, draw as needed during the draw period, repay (fully or partially), and borrow again up to the limit. During the draw period (typically 5–10 years in the US), minimum payments are usually interest-only. After the draw period ends, the repayment period begins (typically 10–20 years) and you repay principal and interest on the outstanding balance. The interest rate is variable — typically tied to the US Prime Rate or Canadian prime rate plus a spread. See CFPB — What is a HELOC?

In the US, lenders typically allow a combined loan-to-value (CLTV) of 80–90% of your home's appraised value. CLTV includes your first mortgage balance plus the HELOC limit. Example: $500K home at 85% CLTV = $425K max combined debt. If your mortgage is $300K, maximum HELOC = $125K. In Canada, federally regulated lenders (banks) cap the combined mortgage + HELOC at 80% of the home's appraised value. The HELOC component is capped at 65% of appraised value (OSFI Guideline B-20). Example: $600K home — HELOC capped at $390K (65%), combined at $480K (80%). Credit unions may have different rules. See FCAC — HELOC Canada.

A HELOC is a revolving line of credit with a variable rate — you draw and repay flexibly, and your payment fluctuates with the rate. A home equity loan (also called a second mortgage or HE loan) is a lump-sum loan at a fixed rate with fixed monthly payments over a set term. HELOCs are better for ongoing or unpredictable expenses (renovations in stages, tuition). Home equity loans are better for one-time large expenses (debt payoff, major renovation) where you want payment certainty. Both use your home as collateral. In Canada, home equity loans are less common — most lenders offer HELOCs bundled with a readvanceable mortgage (e.g., RBC Homeline, TD Home Equity FlexLine). See Investopedia — HELOC vs. Home Equity Loan.

In the US: HELOC interest is deductible only if the funds are used to buy, build, or substantially improve the home securing the HELOC (post-Tax Cuts and Jobs Act 2017). Using a HELOC for personal expenses (vacation, car, credit cards) = no deduction. The deduction is claimed on Schedule A (itemized deductions) and is subject to the $750,000 home acquisition debt limit. In Canada: HELOC interest is not deductible for personal use. However, if HELOC proceeds are used to earn investment income (buying stocks, rental property), the interest may be deductible as an investment expense under the CRA's "direct use" test. Consult a tax advisor before using a HELOC for investment purposes. See CRA — Deductible Interest.

Using a HELOC from one property as a down payment on another is possible, but lenders treat HELOC funds as borrowed funds — not your own equity — when the HELOC is from a different property than the one being purchased. Lenders require disclosure of HELOC-sourced down payments; the HELOC payment will be included in your debt-to-income ratio, reducing your purchasing power. In Canada, CMHC rules prohibit using borrowed funds for the required 5% minimum down payment on insured mortgages — a HELOC draw is borrowed money. For conventional (uninsured) mortgages in Canada (20%+ down), borrowed down payments are permitted but must be declared and the HELOC payments factored into your GDS/TDS ratios. See Canada housing policy update 2027.

Key HELOC risks: (1) Variable rate exposure: HELOC rates rise with the prime rate — a 3% rate increase can add hundreds per month to your payment on a large balance; (2) Payment shock at repayment period: switching from interest-only to principal + interest payments can double or triple your monthly cost; (3) Collateral risk: defaulting on a HELOC means the lender can foreclose, even if your first mortgage is current; (4) Overspending temptation: revolving access makes it easy to accumulate debt; (5) Rate freeze / cancellation: lenders can reduce or freeze your HELOC if home values drop or if your financial situation deteriorates significantly. In Canada, OSFI Guidelines mean federally regulated lenders must conduct periodic reviews. See CFPB — Mortgage and home equity tools.