Your home is likely your largest asset — and after years of mortgage payments and property appreciation, you may be sitting on significant equity. A home equity loan lets you borrow against that value as a lump sum with fixed, predictable payments, without disturbing your existing mortgage.
Whether you're planning a major renovation, consolidating high-interest debt, or funding a child's education, understanding how home equity loans work in Canada is the first step toward making a confident decision.
What Is a Home Equity Loan?
A home equity loan is a second mortgage that lets you borrow a fixed amount against the equity you've built in your home. You receive the funds as a lump sum and repay them over a set term with fixed monthly payments — much like your original mortgage.
Unlike a HELOC (which works like a revolving credit line), a home equity loan gives you certainty: you know exactly how much you're borrowing, what your payment is, and when the loan will be paid off.
Key characteristics:
- Fixed interest rate and fixed payments
- Lump-sum disbursement at closing
- Separate from your first mortgage (sits in second position)
- Terms typically range from 1 to 25 years
- Borrow up to 80% of your home's value (combined with first mortgage)
Home Equity Loan vs HELOC vs Refinance
Choosing the right way to access your equity depends on how you plan to use the funds and your appetite for rate risk.
| Feature | Home Equity Loan | HELOC | Refinance |
|---|---|---|---|
| How you receive funds | Lump sum | Draw as needed | Lump sum (rolled into new mortgage) |
| Interest rate | Fixed | Variable (usually Prime + 0.5%) | Fixed or variable |
| Payment structure | Fixed monthly | Interest-only minimum | Fixed monthly |
| Keeps first mortgage? | Yes | Yes | No — replaces it |
| Best for | One-time large expense | Ongoing or uncertain needs | Lowering overall rate + accessing equity |
| Typical rate range | 5.49%–8.99% | 4.95% (Prime + 0.5%) — some lenders offer Prime (4.45%) bundled with mortgage | 3.69%–4.99% |
| Prepayment penalty risk | Only on the equity loan | None (open) | On the new mortgage |
Read our detailed HELOC vs Home Equity Loan comparison
How Much Can You Borrow?
In Canada, most lenders allow you to borrow up to 80% of your home's appraised value, minus your outstanding mortgage balance. This is called your Loan-to-Value (LTV) ratio.
Formula:
Maximum borrowing = (Home value × 80%) − Mortgage balance
Example calculations:
| Home Value | Mortgage Balance | Max Equity Available | LTV |
|---|---|---|---|
| $600,000 | $350,000 | $130,000 | 80% |
| $800,000 | $400,000 | $240,000 | 80% |
| $1,200,000 | $600,000 | $360,000 | 80% |
| $500,000 | $420,000 | $0 (insufficient equity) | 84% already |
Some private lenders will go up to 85% or even 90% LTV, but at significantly higher rates (typically 8–12%).
See our full borrowing calculator and examples
Qualification Requirements
Getting approved for a home equity loan in Canada requires meeting several criteria:
Credit Score
- A-lenders (banks/credit unions): 650+ for best rates
- B-lenders: 550–649, with higher rates
- Private lenders: No minimum score — equity-focused lending
Options for home equity loans with bad credit
Income Verification
- Employment letter and recent pay stubs
- T4s and Notice of Assessments (2 years)
- Self-employed: business financials, bank statements
Property Requirements
- Must be a residential property (1–4 units)
- Current appraisal required (lender-ordered)
- Property must be in acceptable condition
- Sufficient equity (at least 20% after the loan)
Debt Service Ratios
- GDS (Gross Debt Service): Housing costs ≤ 32–39% of gross income
- TDS (Total Debt Service): All debts ≤ 42–44% of gross income
- Stress test applies at qualifying rate (contract rate + 2%)
Current Home Equity Loan Rates
Home equity loan rates depend on your credit profile, LTV ratio, and lender type.
| Lender Type | Typical Rate Range | Best For |
|---|---|---|
| Major banks | 5.49% – 6.99% | Strong credit, low LTV |
| Credit unions | 5.29% – 6.49% | Members, competitive rates |
| B-lenders | 6.99% – 8.99% | Fair credit, higher LTV |
| Private lenders | 7.99% – 11.99% | Bruised credit, fast closing |
Rates are higher than first mortgages because home equity loans sit in second position — if you default, the first mortgage gets paid first.
See current home equity loan rates
Best Uses for a Home Equity Loan
Home equity loans work best when you need a specific, known amount for a defined purpose:
Home Renovations
Major renovations (kitchen, basement, addition) can increase your home's value while improving your living space. A home equity loan provides the full budget upfront so you can pay contractors without delays.
Debt Consolidation
Replacing 19–29% credit card interest with a 5.49–7% home equity loan can save thousands annually. Fixed payments also make budgeting easier.
Education Costs
Fund post-secondary education with rates far below student lines of credit or personal loans.
Investment Property Down Payment
Use your primary home's equity to fund the 20% down payment required for an investment property.
Emergency or Major Life Events
Medical expenses, divorce settlements, or business investment — a home equity loan provides certainty when you need it most.
5 smart ways to use a home equity loan in 2026
Tax Implications in Canada
Unlike the United States, Canada does not allow tax deductions on mortgage interest for your primary residence — including home equity loans used for personal purposes.
However, interest IS deductible when:
- Funds are used to purchase income-producing investments (stocks, rental property)
- Funds are used for business purposes
- You can clearly trace the borrowed funds to the income-producing use
Important: The CRA traces the use of funds, not the security. If you borrow against your home to invest, keep meticulous records proving the investment purpose.
Consult a tax professional before claiming interest deductions on a home equity loan.
Application Process Step-by-Step
Step 1: Assess Your Equity
Estimate your home's current market value and subtract your mortgage balance. You'll need at least 20% equity remaining after the loan.
Step 2: Check Your Credit
Pull your credit report from Equifax or TransUnion. Scores above 650 qualify for the best rates. If your score is lower, consider B-lender or private options.
Step 3: Gather Documents
Prepare: government ID, mortgage statement, recent pay stubs, T4s/NOAs, property tax bill, and proof of home insurance.
Step 4: Get Pre-Qualified
A mortgage broker compares options from multiple lenders simultaneously — saving you time and potentially thousands in interest.
Step 5: Property Appraisal
The lender orders an appraisal to confirm your home's current value. Cost: $300–$500 (sometimes waived).
Step 6: Approval & Legal Review
Once approved, a lawyer handles the registration of the second mortgage on title. Legal fees: $800–$1,500.
Step 7: Receive Funds
After closing, funds are deposited directly into your bank account — typically within 2–5 business days.
Access Your Home Equity Today
Your home equity is one of the most powerful financial tools available to you. Whether you're consolidating debt, renovating, or investing, a home equity loan provides the certainty of fixed payments and a defined payoff timeline.
The key is working with a broker who can compare options across multiple lenders — ensuring you get the lowest rate and best terms for your specific situation.
Calculate your home equity loan payment
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