HELOC Fundamentals

A home equity line of credit is revolving credit secured against residential property. The borrower may draw funds up to the approved limit, repay some or all of the balance, and generally reuse the repaid credit. Interest begins when money is drawn, not merely because the limit exists.

That structure is fundamentally different from a mortgage or home-equity loan that advances a fixed amount and uses a scheduled amortization to reduce principal. A HELOC can remain outstanding indefinitely if the contract permits low minimum payments and the borrower does not impose a principal-repayment plan.

FCAC distinguishes standalone HELOCs from HELOCs combined with a mortgage. A standalone HELOC operates independently from the mortgage and its credit limit does not automatically increase as mortgage principal is repaid. A combined HELOC is tied to the same lender’s mortgage, and permitted available credit may increase as mortgage principal falls.

The combined version is commonly called a readvanceable mortgage or combined loan plan. Because its borrowing limit interacts with the mortgage segment, the homeowner should distinguish the mortgage balance, HELOC balance, HELOC limit and overall authorized plan limit rather than treating them as one number.

For mainstream HELOCs in the federally regulated financial-institution framework, FCAC currently describes more than 35% equity for a standalone HELOC and 20% equity for a HELOC combined with a mortgage. At a bank, the borrower must also pass the applicable stress test and satisfy income, credit, debt and property requirements. These figures should not be treated as universal minimum-equity rules for private secured lines; a private lender can set its own maximum LTV or CLTV and underwriting requirements.

The equity threshold therefore answers only whether there may be enough property cushion for the product. A borrower can meet the equity test and still be approved for a smaller limit—or not approved at all—because the monthly debt burden or other policy requirements do not fit.

OSFI expects federally regulated financial institutions (FRFIs) to limit the non-amortizing revolving HELOC portion to 65% LTV. Within that FRFI framework, additional uninsured residential secured lending can exist above 65% up to the applicable 80% ceiling, but the amount above 65% must be amortizing and non-readvanceable.

This means “my bank can lend to 80%” does not mean “I can have an 80% revolving bank HELOC.” The 65% figure should not be generalized to private lenders. Some private lenders offer revolving home-secured lines or HELOC-style products and set their own maximum LTV or CLTV according to mortgage position, property, borrower circumstances, exit, pricing and risk appetite. A private lender may therefore use a ceiling below or above 65%; the actual commitment and product terms govern.

The limit is the maximum credit authorized under the line. The balance is what is currently owed. Available credit is generally the limit minus the balance, subject to lender restrictions. In a readvanceable plan, the limit available to the revolving segment can also change as the mortgage segment amortizes.

Borrower decisions should be based on the expected maximum balance, not simply the approved limit. A large unused limit can create convenience, but it can also create behavioural risk and may matter in future lender qualification or security decisions.

FCAC notes that most HELOCs have variable pricing, commonly expressed relative to the lender’s prime rate. Interest is charged on the amount borrowed. If the reference rate or lender margin changes, the interest cost and minimum payment can rise.

The risk is asymmetric when a borrower is making only the minimum: a higher rate immediately increases carrying cost, while the principal remains unchanged unless the payment exceeds interest. A HELOC should therefore be tested at rates above the starting rate rather than judged only by today’s payment.

Low required payments are not the same as a repayment plan. If the minimum is approximately interest-only, a borrower can remain fully current while making little or no progress on principal. The debt can then outlive the renovation, education expense or other purpose that created it.

A useful self-imposed rule converts the balance into a target amortization: decide when the HELOC should be repaid and calculate a recurring payment that includes principal. Flexibility should be treated as permission to prepay faster, not permission to avoid a debt-free date.

Revolving credit is particularly useful when the timing and amount of future draws are uncertain: a phased renovation, tuition schedule, irregular business cash-flow bridge or emergency reserve. Interest is generally charged only on the amount actually drawn, so unused capacity does not create the same interest expense as a fully advanced lump-sum loan.

If the borrower will draw the entire amount immediately and repay it slowly over years, an amortizing refinance or home-equity loan may provide stronger payment discipline and potentially different pricing. The right product follows the use pattern.

Using a HELOC to repay credit cards can lower the interest rate, but the transaction is only durable if the old unsecured balances stay repaid and the HELOC principal is reduced. Otherwise the homeowner can end with both a HELOC balance and rebuilt credit-card balances.

The safest comparison uses a fixed target payoff date, an automatic payment above interest and a decision about whether repaid unsecured accounts should remain open at their old limits. The goal is lower total debt, not merely a lower minimum payment.

Many mortgage-linked HELOCs are secured through a collateral charge. FCAC explains that a collateral charge can secure multiple loans with the same lender and may be registered for more than the initial mortgage amount. This can make future borrowing with the same lender convenient.

The same structure can make switching, discharge or subordinate financing more complex. A homeowner should know what obligations the charge secures, the registered amount, whether another lender can register behind it, and what must be paid or closed to move the mortgage elsewhere.

In the Richmond Hill secured-line case, the borrowers’ need was temporary and funds were expected from an overseas property sale months later. Preserving the low-rate first mortgage mattered, and the clients expected to draw money over time rather than all at once.

The line structure meant interest was paid only on funds actually used. The borrower lesson is broader than the private-lending context: when a need is staged, compare the average expected balance under a HELOC with the full amount advanced on day one under a term loan.

Before drawing, define a maximum balance, principal-payment amount, target payoff date and trigger for conversion to an amortizing loan. Examples of triggers include completion of a renovation, receipt of a known asset-sale amount, the balance remaining above a threshold for six months, or a rate increase that makes the variable line too expensive.

If the only plan is “I can keep paying the interest,” the HELOC has become permanent mortgage debt without an amortization schedule. That may be acceptable only if it is an informed, sustainable choice rather than an accidental result.