Home Equity Loan vs Line of Credit: Which Should You Choose in 2026?

You’ve built up equity in your home. Now what? Turns out, you’ve got two main ways to access it: a home equity loan or a home equity line of credit (HELOC). They’re not the same thing, and choosing the wrong one could cost you thousands.

Here’s the thing — borrowing against your home is back in a big way. According to Statistics Canada, Canadians held $170.8 billion in HELOC balances as of September 2024, up 3% from the year before. That’s the highest level in nearly two years. With mortgage renewals hitting hard and renovation costs climbing, more homeowners are tapping their equity.

But before you sign anything, you need to know what you’re getting into.

What Is a Home Equity Line of Credit (HELOC)?

A home equity line of credit is a revolving credit account secured by your home. Think of it like a credit card, except your house is collateral and the limit is much higher. You borrow what you need, when you need it, up to your approved limit. Interest only applies to what you actually borrow.

In Canada, you can typically borrow up to 65% of your home’s appraised value through a standalone HELOC. If it’s bundled with a mortgage (called a re-advanceable mortgage), you can access up to 80% of your home’s value combined.

HELOCs are popular because they’re flexible. Need $5,000 this month and $10,000 next quarter? No problem. You’re not locked into a fixed amount upfront.

What Is a Home Equity Loan?

A home equity loan is a lump-sum loan secured by your home. You get the full amount at once, and you pay it back over a fixed term with regular monthly payments. Interest rates are usually fixed, so your payment stays the same every month.

In Canada, this is often structured as a second mortgage if you already have an existing mortgage. You can typically borrow up to 80% of your home’s value minus what you still owe on your first mortgage.

Home equity loans work best when you know exactly how much you need and want predictable payments. Renovating your kitchen for $40,000? A home equity loan gives you certainty.

How Do Interest Rates Compare?

This is where it gets tricky. HELOCs almost always carry variable interest rates, meaning your cost can go up or down with the Bank of Canada’s policy rate. As of early 2025, most HELOC rates sit at prime plus 0.5% to prime plus 1% — that’s roughly 6% to 6.5% right now.

Home equity loans usually offer fixed rates, which are generally higher than HELOC rates but give you payment stability. You might pay 7% to 8% fixed, depending on your lender and credit profile.

Which costs more? It depends. If rates drop, a HELOC saves you money. If they rise, a fixed-rate home equity loan protects you from surprises.

When Should You Choose a HELOC?

Go with a HELOC if you need ongoing access to funds and don’t mind managing a variable rate. It’s ideal for unpredictable expenses like home repairs, consolidating debt as it pops up, or covering irregular business costs.

Mortgage Professionals Canada data shows the average HELOC balance at the end of 2023 was $37,495 — down from the year before. That suggests people are using HELOCs strategically, not maxing them out.

A HELOC also makes sense if you’re comfortable with interest-only payments in the short term. Most lenders require you to pay at least the interest each month, but you’re not forced to pay down the principal immediately.

When Should You Choose a Home Equity Loan?

Pick a home equity loan if you need a specific lump sum and want fixed payments. It’s the better option for one-time expenses like a major renovation, paying off a large debt, or covering a down payment on a second property.

You’ll know exactly what you owe every month, and there’s no temptation to keep re-borrowing. Once you pay it off, you’re done.

If you’re risk-averse or worried about rising rates, the fixed structure gives you peace of mind. You won’t wake up to a higher payment because the Bank of Canada adjusted rates.

What About Fees and Approval Requirements?

Both products require an appraisal of your home, which can cost $300 to $500. HELOCs often come with setup fees (sometimes $300 to $1,000), though some lenders waive them. Home equity loans may charge legal fees and registration costs, especially if it’s a second mortgage.

For approval, lenders look at your credit score, income, and how much equity you have. You’ll typically need a credit score above 650, proof of income, and at least 20% equity in your home.

One big difference: HELOCs require you to pass the mortgage stress test, meaning you need to qualify at a higher rate than you’re actually paying. Home equity loans don’t always face the same rule if they’re from a private lender or credit union.

Can You Switch Between Them Later?

Not easily. If you have a HELOC and want a fixed-rate home equity loan instead, you’re looking at refinancing — which means legal fees, discharge fees, and possibly a penalty if you’re breaking a term. Same thing if you want to convert a home equity loan into a HELOC.

Some lenders offer hybrid products (like Scotia Total Equity Plan or TD Home Equity FlexLine) that let you lock in portions of your HELOC balance at a fixed rate. That gives you flexibility without a full refinance.

Bottom line: choose the right product upfront. Switching later isn’t cheap.

Which Option Saves You More Money?

It depends on how you use it and what rates do. If you borrow $40,000 on a HELOC at 6% variable and rates drop to 5% over two years, you’ll save money. If rates climb to 7%, you’ll pay more than you would’ve with a fixed-rate loan at 7%.

Run the numbers before you decide. If you’re disciplined and can pay down a HELOC quickly, the lower rate usually wins. If you need five years to repay and want no surprises, a fixed home equity loan is safer.

One thing’s for sure: don’t borrow more than you need just because the limit is there. That’s how people end up house-rich and cash-poor.

Frequently Asked Questions

What’s the main difference between a home equity loan and a HELOC?

A home equity loan gives you a lump sum upfront with fixed payments, while a HELOC works like a credit card where you borrow as needed and pay interest only on what you use. According to CMHC data, HELOCs make up 7.8% of Canada’s $2.2 trillion in residential mortgage debt.

Can I have both a HELOC and a home equity loan at the same time?

Yes, but your total borrowing can’t exceed 80% of your home’s value across all secured debts. Lenders will assess your ability to service both products when you apply.

Do I need to pass the mortgage stress test for a home equity loan?

Not always. HELOCs require the stress test, but home equity loans from private lenders or credit unions may not. Big banks usually apply the stress test to both products.

What happens if I can’t make payments on a HELOC or home equity loan?

Because both products are secured by your home, the lender can force a sale if you default. Missing payments also damages your credit score. If you’re struggling, contact your lender early to discuss options.

Is it better to use a HELOC or refinance my mortgage?

Refinancing usually offers the lowest rate but comes with penalties if you break your term early, plus legal and appraisal fees. A HELOC avoids those costs but charges a higher rate. Use a HELOC for short-term needs and refinancing for major, long-term borrowing.