Mortgage vs. HELOC: When Each One is Best

Are you trying to decide whether a mortgage or HELOC is best for your property? Here are some things to consider.


If you’re putting down less than 20% on a property, then you don’t have a choice. You have to take out a mortgage. However, if you’re putting at least 20% down, that’s when you can choose a mortgage or HELOC.

A mortgage is advantageous because it typically comes at a lower interest rate than a HELOC. For example, while variable rate mortgages are available for Prime Rate, minus 1%, HELOCs are typically Prime Rate, plus 0.50%.

A mortgage is also advantageous because it forces you to pay it down. A mortgage is an amortizing loan, which means that you are forced to make payments that include both interest and principal.

Choose your mortgage link here; BC, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland, PEI, Northwest Territories, Yukon and Nunavut.

At Smarter Loans, our goal is to make it easy as possible for you to get the residential mortgage you are looking for to buy your new home. Pre-apply for a mortgage now!

Meanwhile, a HELOC lets you make interest-only payments. With a HELOC you could technically pay interest only payments and never pay down the principal for many years.

Most mortgages do limit how much you can prepay a year, however, for the vast majority of Canadians it’s plenty. For example, if you have a $500k mortgage and you can make lump sum payments of 20%, that means you can prepay up to $100k a year. That’s usually more than enough for 95% of Canadians.

A lot of Canadians also don’t want to pay down their mortgage sooner with the low interest rate environment. They’d rather invest their extra cash flow where they may be able to earn a lot more long-term.


A HELOC can be best when you’re expecting a large cash windfall. For example, if you’re expecting an inheritance or a huge bonus at work that will be enough to pay off your mortgage in full, you might choose to renew your mortgage into a HELOC rather than another mortgage.

For example, if you expect an inheritance of $200k and you plan to use some of that to pay off your $100k mortgage, you might choose to renew your mortgage into a $100k HELOC and pay it off when you receive the inheritance in the next few months. It’s a lot better than paying a mortgage prepayment penalty for exceeding your prepayment privileges.

HELOCs tend to be a better option than open mortgages. Open mortgages let you pay off your mortgage in full at any time without incurring a penalty, but come with a lot higher mortgage rates. You could be looking at a mortgage rate that’s 2-3% higher than standard mortgages. Meanwhile, HELOCs typically only go for Prime, plus 0.50%.

HELOCs do have their limitations. To help protect the home equity of Canadians, the government limits how much you can borrow via a HELOC. You can borrow up to 65% of your property’s appraisal value by way of a HELOC. This differs from a mortgage, which lets you borrow up to 95% of your home’s purchase price in some cases.

Click the appropriate Canadian HELOC link; Alberta, BCManitobaNew Brunswick, Newfoundland, Nova Scotia, Ontario, PEI, Quebec, Saskatchewan, and Yukon to find out more information and apply for home equity loans in your province or territory. Additionally, take a moment and read the How HELOC Loans Work article to get a further understanding of how Home Equity Loans work

Why Not Go With Both?

A third option is that you could go with both or a hybrid option. Mortgages and HELOCs aren’t mutually exclusive.

For example, if you’re expecting a huge cash windfall, but it won’t be enough to pay off your mortgage in full, you could take out a mortgage and HELOC. Let’s say you have a $300k mortgage and you expect to receive a cash windfall of $100k from inheritance.

When your mortgage comes up for renewal, you could take out a mortgage of $200k and a HELOC of $100k. That way you can freely pay off the HELOC without incurring a costly mortgage penalty.


For most people a mortgage makes the most sense. However, if you expect a large cash windfall, that’s when a HELOC can make sense. You can also go with both, especially if you plan to use money for other purposes like home renovations.

The longer it takes to resolve home repairs, the more damage you might face when you finally decide to renovate. All that said – why wait when there are home equity loans? Find out how these loans can help you fully renovate your home today, and pay for it tomorrow.


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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.