Home Equity Loans in Canada, Explained

A home equity loan in Canada is a lump sum you borrow against the equity in your home, secured by a charge on the property while your original mortgage usually stays in place. You receive the money up front, repay it over a set amortization with interest, and your home is the collateral.

What Counts as a Home Equity Loan in Canada

Equity is the difference between your home's current market value and the balance remaining on your mortgage. If your property is worth more than you owe, that gap is borrowing room. A home equity loan converts part of that room into cash paid out in one lump sum.

In Canada, the label covers a few different structures. Most commonly it is a second mortgage: a new loan registered behind your first mortgage on title. Some lenders instead use a refinance, replacing your first mortgage with a larger one and paying you the difference. A few offer a fixed-rate advance drawn from a home equity line of credit. The money is the same, but the paperwork, costs, and approval rules are not.

Home Equity Loan vs. HELOC vs. Refinance vs. Reverse Mortgage

Structure	How you receive funds	Rate type	Best suited to
Home equity loan (second mortgage)	Single lump sum	Usually fixed	A defined one-time cost with a set repayment plan
HELOC	Draw, repay, and redraw as needed	Usually variable	Ongoing or unpredictable expenses
Refinance	Lump sum from a bigger first mortgage	Fixed or variable	The largest amount at the lowest available rate
Reverse mortgage	Advances, with no required payments	Typically fixed or variable	Homeowners typically 55 and older who want to stay put

Which one fits your situation?

If you need a set amount and want predictable payments, a fixed second mortgage is straightforward. If flexibility matters more, compare the options in home equity loan versus HELOC. If you need the most money at the best rate and can absorb the penalty on your existing mortgage, a refinance is often cheaper, covered in accessing home equity through a refinance.

How Much Can You Borrow Against Your Home?

Lenders cap total secured borrowing as a percentage of appraised value. Federally regulated lenders generally limit a revolving HELOC to 65% of value and combined first-plus-second borrowing to 80%, though limits and exceptions vary, so confirm the current rules with your lender. The room you actually have is that ceiling minus your existing mortgage balance.

Illustration: a home appraised at $500,000 with a $300,000 mortgage leaves roughly $100,000 of space under an 80% combined ceiling before fees. The value a lender uses may differ from your own estimate or your municipal assessment, and automated valuations can be more conservative than a full appraisal.

Qualifying: Stress Test, GDS/TDS, and B-20

A loan secured by your home falls under OSFI Guideline B-20 when you borrow from a federally regulated lender. That means you are qualified at the mortgage stress test rate: the higher of your contract rate plus two percentage points or the published qualifying-rate floor. Confirm the current floor with OSFI or your lender, and read the stress test explained.

Lenders also measure your GDS and TDS ratios. Your new payment is added alongside property taxes, heating costs, half of condo fees where applicable, and all your other debts. Because a second mortgage sits behind the first in priority, lenders price it higher and look closely at combined loan-to-value.

Credit unions, provincially regulated lenders, and private lenders operate under different rules. That is why second mortgages and private lending exist for borrowers who do not fit standard bank criteria.

What a Home Equity Loan Costs

• Appraisal or automated valuation fee
• Legal and registration costs to place a charge on title
• Lender or brokerage fee, sometimes deducted from your advance
• Interest that is typically higher than a first mortgage, because a second lender is paid second if things go wrong
• Discharge fees when you pay it off
• Prepayment penalties, which may be three months of interest or an interest rate differential, depending on the contract

Ask for the total cost of borrowing, not just the rate. A slightly higher rate with no lender fee can beat a lower headline rate with a large fee added to your balance.

Risks You Should Weigh First

Your home secures the debt. Miss payments and the lender can move toward power of sale. Second mortgages often carry shorter amortizations and higher rates, so payments can be steeper than you expect.

If you are using equity to pay off credit cards, you are converting unsecured debt into secured debt. That can lower your interest and simplify your payments, but it also puts your home on the line for balances that were not tied to it before. Read using home equity to consolidate debt before you commit, and address the spending that created the balances in the first place.

Refinancing instead? Breaking a fixed mortgage early can trigger a large penalty that wipes out the savings.

How to Shop for a Home Equity Loan

1. Estimate your equity using a realistic market value, not a hopeful one.
2. Check your credit report and score before a lender does.
3. Ask your current lender first, since it already holds first position and may offer better terms.
4. Get quotes from more than one lender, including a credit union.
5. Compare total cost of borrowing, penalty wording, and whether the rate is fixed or variable.
6. Ask directly whether a refinance or a HELOC would be cheaper for your situation.

Programs such as the RRSP Home Buyers' Plan and the First Home Savings Account help people buy a home, not borrow against one they already own. Homeowners who want to unlock equity without required payments should look at reverse mortgages in Canada.

Frequently Asked Questions

See the quick answers below, then confirm your own numbers with a lender or a licensed mortgage professional before you sign anything.