Best Canada HELOC Rates

What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a revolving account that lets you borrow against your home equity at will. The lender secures it against your home, which is often why they’re called secured lines of credit (SLOCs).

The repayment terms are fully open, meaning that you can repay up to 100% of the loan in a lump sum payment anytime. The monthly payments generally consist of interest only, and the interest rate varies with the prime rate.

Compare HELOC rates

When shopping for any financial product, whether it’s a mortgage, credit card or a HELOC, it’s crucial to compare rates in order to get the best value possible.

There’s no downside to switching financial institutions if you find one offering mortgage and/or HELOC terms that are superior to your existing lender. However, it’s important to do the math first to ensure the move makes financial sense once you factor in fees and mortgage breakage penalties.

Mortgage rate comparison websites, such as Rates.ca, have tools to help you evaluate HELOC rates being offered by the major financial institutions in Canada. This helps you contrast different offers in as little as five minutes.

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HELOC pros and cons

Pros

Flexibility: Because a HELOC is a revolving credit facility, you can borrow and repay the money as needed, with no fixed payments. You are only responsible for paying the monthly interest cost.
Lower Rates: HELOCs typically come with more competitive interest rates (currently about 2.95%-3.95%), which is materially lower than many personal lines of credit — and far lower than other credit options, like a credit card at 19%+ interest.
Emergency Fund: A HELOC can substitute a traditional cash emergency fund without you actually having to scrounge the money together and having it sit rotting in a savings account.
An Open Alternative: HELOCs are usually cheaper than open mortgage rates and make good short-term financing solutions when you know you’ll repay the loan within 6-12 months.

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Cons

Fluctuating Interest: Your interest costs can rise unexpectedly if rates climb (although in economic slowdowns such as early 2009 or 2020, rates seldom rise much for years.)
Easy to Overuse: Because a HELOC is “revolving,” it’s very easy to dig a sizeable debt trap and become stuck there if you’re not financially disciplined.
Lingering Debt: Making just interest-only payments can keep you indebted for many years beyond a traditional mortgage.
Harder Approvals: HELOCs are harder to get approved for if you have above-average debt ratios. You need pristine credit, a reasonable debt load and fully provable income. Most lenders also require floating-rate borrowers to prove they can afford payments at the posted 5-year fixed rate. This higher “stress test” rate is used for qualification purposes in case rates soar. Lenders are also more careful about who they approve for HELOCs, given that there’s no set payment schedule to keep borrowers disciplined.
Not Guaranteed: Remember that in times of crisis or in the event your lender judges that you are misusing your credit, your financial institution can freeze your credit limit, increase the interest rate or in extreme cases, call in your HELOC. This is especially true if you miss any payments, your credit score is falling and/or your home value is plummeting.

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Frequently asked questions about HELOC rates

Why choose a HELOC?

Perhaps the biggest benefit of a HELOC is its flexibility. That’s what makes them so popular.

HELOCs offer attractive borrowing rates for large sums of money—up to 65% of your home’s value. If you use a credit union or lock part of the HELOC into a regular mortgage, you can borrow up to 80% of the home’s value.

Rolling other debt into a secured credit line is an effective way to reduce interest costs on higher-interest borrowing, particularly credit cards. And it can also serve as:

a handy rainy day or emergency fund (allowing you to keep emergency cash invested at a higher rate of return)
investment capital
business capital (helpful for the self-employed with inconsistent cash flows)
a source of funds to cover anything from medical expenses to renovations to a family member’s post-secondary education
a full-fledged bank account (which allows you to benefit from interest offsetting, assuming you have an “all-in-one” line of credit — i.e., reducing debt balances with your paycheque)

What is the best HELOC rate?

The best value changes every few months or so. In early 2020, for example, Tangerine emerged as the most competitive SLOC lender in Canada. Tangerine held on to the title of lowest HELOC rate through the COVID-19 lockdown, with its rate dipping down to just 2.35% (prime – 0.10%).

That’s the first time in years that Canada saw a widely advertised HELOC rate under prime rate. It’s also well below average big bank HELOC rates, which are commonly priced at prime + 0.50%, or 60 basis points higher. (One basis point equals 1/100th of a percentage point.)

What causes HELOC rates to change?

HELOC rates are based on two things:

a) Prime rate

b) The lender’s premium or discount to prime rate

Prime rate generally changes when the Bank of Canada increases or decreases its overnight target rate. That happens when the Bank of Canada needs to stimulate or slow the economy to meet its 2% inflation target.

The premium or discount changes based on the lender’s profit and market share objectives, as well as its cost of funds. Amid economic crises, for example, mortgage funding markets often become illiquid and lenders must pay more for capital. They in turn charge more for HELOCs by increasing the premium to prime rate, as they did in 2008, for example.

Lenders source HELOC funds mainly from deposits and other short-term money-market instruments. HELOCs are generally not securitized (sold to investors) because they cannot be default insured. Lack of available default insurance increases the yields investors demand, making it too costly to fund most HELOCs via securitization.

What are predictions for HELOC rates in 2020?

Predictions for HELOC rates generally follow forecasts of prime rate, which in turn correspond to projections of the Bank of Canada’s overnight rate. With the economy emerging from recession in 2020, economists expect that prime rate, the overnight rate and HELOC rates will all remain near long-term lows through 2022. For more information, please refer to our prime rate page.

Which is better, a HELOC or a reverse mortgage?

For seniors in need of funds and contemplating whether to get a reverse mortgage or a credit line, here are a few best practices for those who opt for the HELOC:

Keep your HELOC limit at about 75-80% of what you’d get with a reverse mortgage. By doing this, you ensure you can always refinance into a reverse mortgage in case you become unable to keep up with the HELOC payments, or if your lender freezes your HELOC for some reason.
Apply for a HELOC before you retire and while your income is higher. This will likely maximize your odds of being approved compared to applying once in retirement.
In certain cases, and if permitted by the lender, you can make the required interest-only payments directly from the HELOC itself, so you're not out-of-pocket each month.
Of course, your best bet is to contact an experienced broker to verify the right strategy for your personal scenario.

HELOC rule changes

In recent years, HELOC usage has risen to levels that regulators deem concerning. Canadian banks responded by tightening lending criteria. For example, it’s now common to approve borrowers based on them theoretically using the full amount of their HELOC limit, even though there may be no borrowing at the time of closing.

In other words, despite having a zero balance, a bank will assume you’ll use all of your credit and test your ability to carry those theoretical interest costs.

The bank will also generally apply a theoretical payment based on a 25- or 30-year amortization, and make sure you can afford it—again, assuming you maxed out the HELOC.

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HELOC stats

Here’s a collection of recent statistics on Canadian HELOCs:

1.6 million: The number of HELOC holders
80%: The average home equity, as a percentage of home value, for those without a mortgage but with a HELOC.
$34 billion: The amount of home equity withdrawn by borrowers via HELOCs in 2018.
1 in 5 (19%) say they borrowed more on their HELOC than initially intended (13% borrowed less).
Almost 30% borrowed from Peter (their HELOC) to pay Paul (credit cards, mortgages or other loans).
- 36% of those aged 25-34 do this “frequently” or “most or all of the time.”
41% of HELOC holders aged 25-34 admitted to paying interest-only most or all of the time.
1 in 4 HELOC holders would “struggle” to make payments on their HELOC if the payment amount rose less than $100 a month.

(Sources: Mortgage Professionals Canada and FCAC)