When Does Using Your Home Equity Make Financial Sense?

This blog is proudly presented by easyfinancial as part of the Future You Money Project.

Home equity is the difference between your property's current market value and the remaining balance on your mortgage. If you own a home, you may have built up a fair amount of equity over the years. But when does borrowing against your home equity actually make financial sense?

It can be a useful option when borrowing addresses a specific need, such as consolidating high-interest debt, and the repayments fit comfortably within your budget. However, if your monthly income isn't enough to cover basic living expenses, borrowing against your home won't solve the underlying problem and may put your home at risk if you can't keep up with repayments.

That's why it's important to consider more than the immediate financial relief. Borrowing against your home means reducing the equity available in an important asset to meet a need today. Credit Canada's Future You Money Project, proudly presented by easyfinancial, uses practical tools, guided reflection, and financial stories to help Canadians consider how today’s money decisions can affect their financial future.

To assess whether home equity borrowing is right for you, it helps to understand how much equity you can access, what borrowing options are available, and what each one could cost.

What is home equity, and how much can you access?

Home equity is the difference between your home's current market value and the outstanding balance of your mortgage plus any other loans secured against it.

For example, if your home is worth $700,000 and you owe $400,000 on your mortgage, you have $300,000 in gross equity. However, you can't necessarily borrow the full $300,000.

For a mortgage or combined mortgage-HELOC plan, total borrowing secured against the home generally can't exceed 80% of its appraised value, according to OSFI's guidance on combined loan plans. For a standalone HELOC, the revolving portion is generally limited to 65% of the home's value, as outlined in OSFI's residential mortgage underwriting guidance. These limits apply to federally regulated lenders.  

A reverse mortgage may allow eligible homeowners aged 55 or older to access up to 55% of their home's value, depending on their circumstances and lender, according to the Financial Consumer Agency of Canada.

A home equity line of credit (HELOC), can be used to borrow, repay, and borrow again up to your approved limit. Some HELOCs permit minimum payments that cover only the accrued interest. In that case, the principal will not decrease unless you make additional payments.  

Refinancing your mortgage can allow you to borrow up to 80% of your home's value, subject to your lender's approval and your ability to qualify. A reverse mortgage may allow eligible homeowners aged 55 or older to access up to 55% of their home's value, depending on their circumstances.

These limits help explain why available equity and available credit aren't the same thing. Lenders also consider your income, existing debt, credit history, and ability to make payments. Having substantial equity on paper doesn’t necessarily mean you will qualify to borrow that amount.

Before deciding how much to borrow, understand how each option affects your payments, costs, and financial flexibility.

The four ways to access home equity in Canada

Homeowners can access equity through a HELOC, a home equity loan or second mortgage, mortgage refinancing, or a reverse mortgage. The right option depends on how much you need, how you want to receive it, and how you plan to repay it. 

Home equity line of credit (HELOC)

A HELOC gives you access to a revolving credit limit secured against your home. You can borrow what you need, repay it, and borrow again, up to the approved limit. Because the interest rate is usually variable rather than fixed, payments or interest costs can rise when rates increase.

A HELOC is also a demand loan, meaning your lender can reduce your credit limit or freeze access to the funds in certain circumstances, such as a decline in your home's value or a change in your financial situation.

Many lenders only require you to make monthly interest payments, which means your minimum payment may not reduce the amount you owe. If you don't make additional payments toward the balance, you could carry the debt for years while continuing to pay interest.

Home equity loan or second mortgage

A home equity loan provides a lump sum secured against your property. A second mortgage sits alongside your existing mortgage, meaning you'll have another loan payment to manage. Second mortgages carry higher risk for lenders, meaning higher interest rates for borrowers. Depending on the lender and terms, the interest rate may be fixed or variable.

Second mortgages may involve higher interest rates, shorter terms (often one to two years), and additional renewal or lender fees compared with a first mortgage. Before proceeding, understand how the principal will be repaid or refinanced at maturity and what could happen if you cannot meet the payment obligations, like the chance of foreclosure.

If you’re considering borrowing through a private lender, learn more about private mortgages and the costs and risks involved. Private second mortgages typically include lender fees (1%–3%), broker fees (1%–3%), and legal costs for both parties, which are usually deducted directly from the borrowed funds.

Mortgage refinance 

Refinancing replaces your current mortgage with a new, larger mortgage, allowing you to access some of your equity as cash. Unlike a renewal, which renegotiates the terms of your existing mortgage at the end of its term, refinancing increases the amount you borrow and requires you to qualify for the new loan.

It may offer a lower rate than other borrowing options, but breaking your existing mortgage early can trigger a prepayment penalty and other costs. Extending your amortization can also increase the total interest you pay over time.

If you're weighing your options, learn more about the differences between mortgage renewal and refinancing.

Reverse mortgage

A reverse mortgage allows eligible older homeowners (usually 55+) to access some of their home's value without making regular monthly payments. You don't need to have paid off your existing mortgage in full, but any outstanding balance must generally be repaid with the reverse mortgage proceeds.

Interest is added to the amount borrowed, meaning the balance grows over time and reduces the equity remaining in your home. The loan generally becomes due when you sell or move out, the last borrower passes away, or you default. The borrower or estate may then have a defined period to repay the balance. You must still pay property taxes, maintain home insurance, and keep the property in good condition to avoid default.

Some lenders also offer a No Negative Equity Guarantee, which protects borrowers and their estates from owing more than the home's value when sold, provided the mortgage obligations are met. Always check the specific lender's terms before signing.

Understanding the total cost

The interest rate is only part of the cost of borrowing against your home.

You may also need to pay for an appraisal, legal work, title searches, or administrative fees. Some lenders charge ongoing or cancellation fees, too, so ask for a breakdown of the costs before you commit.

Refinancing can be more expensive if you break your existing mortgage before the end of its term. Depending on your mortgage contract, you could face a prepayment penalty, which may amount to thousands of dollars. Check the penalty and setup fees before deciding whether refinancing is worthwhile.

There's also the longer-term cost of repayment to consider. Rolling existing debt into a mortgage can lower your monthly payments by spreading the balance over a longer period. However, you could pay more interest overall if you take much longer to clear the debt, even at a lower rate.

It's worth considering how that trade-off affects your future financial flexibility and long-term goals, not just how much breathing room it creates in your budget today.

When does using your home equity make financial sense?  

Using your home equity can make financial sense when you have a clear purpose for the money, stable income, a budget that can accommodate repayments, and a defined plan for paying off the debt. 

Consolidating high-interest debt 

Consolidating high-interest debt through a HELOC, home equity loan, or mortgage refinance may reduce interest costs and simplify payments. But the lower rate only helps if you can manage the new payments and avoid building up more debt.

Mike Bergeron, Counselling and Client Services Manager at Credit Canada, explains: “A secured loan can create additional financial risk rather than relief if the payment obligation is unmanageable.”

“Creating a budget that incorporates the new payment and ensuring you can sustain it will reduce risk and help provide the intended financial relief,” says Bergeron.

Before consolidating, look at what caused the debt. If spending regularly exceeds income, moving balances into a loan secured against your home won't resolve the underlying problem.

If you're consolidating high-interest debt, consider how you will prevent the paid-off balances from rebuilding. Depending on your circumstances, this could include reducing available credit limits, closing accounts, or establishing a repayment and spending plan. Be aware that changes to credit accounts may also affect your credit profile.

Renovations, emergencies, and other financial needs

Home equity can also fund necessary repairs, renovations, or unexpected expenses. A 2019 Financial Consumer Agency of Canada (FCAC) report, based on a survey conducted in 2018, found that 49% of HELOC borrowers in its sample used their HELOC for renovations and 22% for debt consolidation. The median amount borrowed for each purpose was $10,000. Because these figures come from a survey sample, they shouldn’t be interpreted as representative of all HELOC borrowers in Canada.  

The FCAC survey also found that 27% of HELOC borrowers in its sample paid interest only most months or every month, meaning they weren't regularly reducing the amount they owed. This highlights the risk of carrying HELOC debt for years without making meaningful progress towards paying it off. Again, these findings reflect the survey sample, not the Canadian population as a whole.

Borrowing for renovations may make sense when the work meets a genuine need, and its cost is reasonable relative to the potential value it adds. For emergencies, consider whether savings or less risky options could cover the expense first.

Before borrowing, decide how much you need, how you'll repay it, and when you expect to clear the balance. Home equity should support a realistic financial plan, not cover an ongoing shortfall.

When it creates more risk than relief 

The key concern here would be converting unsecured debt, such as credit card balances, into debt secured against your property. Before doing so, consider whether alternatives such as a Debt Consolidation Program from a non-profit credit counselling agency, or a consumer proposal could help you address the debt without putting your home at risk as collateral.

“When comparing secured and unsecured loans, many Canadians underestimate the key difference: with a secured loan, missed or irregular payments can put the collateral at risk of repossession,” notes Bergeron.

Also, with a HELOC, making interest-only payments can keep your monthly costs down, but it won't reduce the amount you owe. If you continue borrowing without paying down the principal, the balance can persist for years. A variable interest rate can also increase your costs if rates rise, putting additional pressure on your budget.

Borrowing more than you originally intended can create similar problems, particularly when you have access to a revolving credit limit. Before committing, consider whether you could still afford the payments if your circumstances changed.

If the plan depends on everything going right, or you would struggle to cover essential expenses alongside the new payment, pause and compare alternatives before putting your home on the line.

Before borrowing against your home, speak with a certified Credit Counsellor at Credit Canada to review your options. Call 1 (800) 267-2272.

Five things Canadians get wrong about home equity 

Home equity can be a useful source of credit, but make sure you avoid some of the following common misunderstandings about how it works: 

1. Myth: Having equity means you can borrow the full amount

Reality: The equity in your home is not the same as the amount a lender will let you borrow. Lenders apply borrowing limits and assess your income, existing debt, and ability to repay. In the FCAC survey, only 13% of respondents knew the maximum loan-to-value limit for a HELOC was 65%.  

2. Myth: Consolidating debt means you've solved the problem

Reality: Moving debt into a home equity loan doesn't automatically fix the circumstances that caused it. If your recurring expenses and debt payments continue to exceed your available income, moving the balances into a secured loan may not resolve the underlying problem. You could pay off existing balances only to accumulate new ones.

“Borrowing can contribute to a cycle of debt if [the borrower does] not address the underlying causes of the financial shortfall,” explains Bergeron. “Simply consolidating or adding new credit does not resolve the behaviours or circumstances that led to the debt. Reviewing the contributing factors and actively working to correct them is essential to breaking the cycle.”

3. Myth: A HELOC's rate and limit are fixed once you're approved  

Reality: Your HELOC's interest rate and available credit can change after approval. Most HELOCs have variable rates and are considered demand loans, meaning lenders may be able to reduce your credit limit or freeze access to funds.

In the FCAC survey, just 14% of respondents knew a financial institution could increase a HELOC's rate at its discretion, while only 32% knew the credit limit could be lowered at any time.

4. Myth: Borrowing against your home means paying tax on the money

Reality: Borrowing against your home generally doesn't create taxable income simply because you receive loan proceeds. However, whether you can deduct the interest depends on how you use the borrowed money. Loan proceeds are generally not treated as taxable income solely because the money was borrowed. The tax treatment of interest depends on how the borrowed funds are used and the applicable tax rules. Consider speaking with a qualified tax professional about your circumstances. 

5. Myth: The lowest monthly payment is always the best option

Reality: A smaller monthly payment doesn't necessarily mean a lower total borrowing cost. Compare the interest rate, fees, repayment period, and total interest before deciding. For example, a $50,000 HELOC balance at 7% would generate $35,000 in interest over 10 years with interest-only payments, leaving the original $50,000 balance untouched.

In the FCAC survey, 27% of HELOC borrowers said they paid interest-only most months or every month. Another 19% said they had borrowed more than they originally intended.

Future You: What to weigh before you sign 

A financial decision that offers relief today can affect your options years from now. Credit Canada's Future You Money Project encourages Canadians to look beyond their immediate circumstances and consider how today's money decisions can shape their financial future.

Before borrowing against your home, use the following questions to assess whether the decision makes sense for your finances today and your long-term financial security:

• Is my income stable? Could I still afford the payments if my income dropped or essential expenses increased?
• How long will repayment take, and will I still have a mortgage in retirement? A longer amortization period may lower monthly payments but increase total interest and could mean carrying mortgage debt into retirement, when your income may be lower.
• What happens at mortgage renewal? Could changing rates or renewal terms make the payments harder to manage? Learn how to prepare for your mortgage renewal.
• Has my budget actually changed? If I'm consolidating debt, have I addressed the circumstances that led to it?

Then look further ahead. What might my finances look like in five, 10, or 20 years? Will this borrowing leave room for future expenses, saving, and other priorities, or limit my flexibility?

Thinking about your future self won't eliminate uncertainty, but it can help you decide whether the immediate relief is worth the longer-term commitment.

Options worth comparing first

Other options may help you manage debt or cover a financial shortfall without putting your home up as collateral. Before securing debt against your property, consider whether alternatives could address your financial needs while preserving your home's equity.

A Debt Consolidation Program (also known as a DCP or debt management plan) may help eligible Canadians repay unsecured debt in full, often with interest relief. To learn how a Debt Consolidation Program compares with borrowing against your home, consider speaking with a certified Credit Counsellor.

If you can't realistically repay your debt in full, a consumer proposal may also be worth exploring. This is a formal process administered by a Licensed Insolvency Trustee (LIT) that can allow you to repay a portion of what you owe under agreed terms.

You could also review your budget with a debt calculator, identify expenses to reduce, negotiate payment arrangements with creditors, or develop a repayment plan based on your available income.

Conclusion

Using your home equity can make sense when the borrowing is affordable and supports a clear financial plan.

If you're unsure whether borrowing against your home is the right choice, you don't have to figure it out alone. Credit Canada is a non-profit credit counselling agency offering free, confidential, and unbiased advice, with no sales pressure or obligation to take out a loan.

You can speak with a certified Credit Counsellor at 1 (800) 267-2272 to discuss your options and understand the potential impact on your financial future before committing to a loan.

The Future You Money Project  

The Future You Money Project is proudly presented by easyfinancial. We thank easyfinancial for its support in helping bring free financial tools, real stories, and practical resources to Canadians, empowering them to make more informed decisions and take positive steps towards a stronger financial future.

easyfinancial offers access to credit, including personal and home equity loan options, to Canadians who are underserved by traditional financial institutions. Beyond lending, easyfinancial provides financial education resources, tools, and calculators designed to help Canadians better understand their finances, explore their options, and make confident financial decisions.