Confused about the difference between a home equity loan (HELOC) vs a mortgage? While both options involve borrowing against the value of your home, there are key distinctions to consider. In this article, we’ll break down the nuances of home equity loans and mortgages, giving you a clear understanding of how they work and which one may be best for your needs. Whether you’re a first-time buyer or a seasoned homeowner, this guide will help demystify the world of home financing.

---

Key Highlights

• In Canada, there are two common ways to borrow money: loans and lines of credit. While both options provide individuals with access to funds, the main difference between the two lies in their borrowing structure and purpose.
• A mortgage loan is a long-term loan used to finance the purchase of a property. It is secured by the property itself and typically has a fixed interest rate and payment terms.
• A HELOC is a revolving line of credit that allows homeowners to borrow against the equity in their property. Unlike a mortgage loan, a HELOC provides access to funds that can be used for various purposes.

---

Loan vs Line of Credit: What’s the Difference?

In Canada, there are two common ways to borrow money: loans and lines of credit. While both options provide individuals with access to funds, the main difference between the two lies in their borrowing structure and purpose.

A loan is a fixed amount of money that is borrowed from a lender and is typically repaid in regular installments over a predetermined period of time. Loans often have a specific purpose, such as purchasing a car or financing a home. Interest rates are applied regularly throughout the life of the loan, allowing borrowers to budget and plan their repayments accordingly. Loans are typically best suited for larger, one-time expenses where the borrower knows exactly how much money they need upfront.

On the other hand, a line of credit is a more flexible form of borrowing that provides individuals with access to a predetermined credit limit that they can use as needed. Unlike a loan, where the entire amount is disbursed upfront, a line of credit allows borrowers to withdraw money as they need it. Interest is only charged on the amount that is actually borrowed, and repayment terms can be more flexible. Lines of credit are often used for ongoing expenses or to supplement income during periods of financial uncertainty.

Types of Loans:

Loans are typically used for larger one-time expenses where the borrower knows exactly how much money they need to access. Here are some examples of common types of loans: 

• Mortgage: a mortgage is a loan used to pay for a property and is secured by the home itself. A borrower must qualify with a lender to get a mortgage and then makes regular payments to repay the loan and interest. 
• Automobile loan: this is a loan used to pay for a car and is secured by the vehicle itself. The lender pays the seller for the car and the borrower makes regular payments to the lender.
• Debt consolidation loan: this allows borrowers to consolidate all their debts into one and make one regular payment towards it instead of multiple payments for different debts. The lender will pay off the debt and then receive regular payments from the borrower.
• Home improvement loan: this type of loan is unsecured and allows the borrower to borrow funds to put towards home renovations that will increase the value of their home. 
• Student loan: student loans often depend on the parents’ qualification (income, credit score etc), but are repaid by the student themselves later on. In Canada, repayment is deferred until 6 months after the student graduates.
• Business loan: this type of loan is used to help run a business, where borrowed funds are used to hire staff, purchase inventory or simply inject more capital into the business. 

Types of Lines of Credit:

Lines of credit provide individuals with access to a predetermined credit limit that they can use as needed. Here are some examples of common types of lines of credit: 

• Personal Line of Credit: this type of LOC requires the borrower to have a higher credit score, since it is a general unsecured line of credit for personal use and therefore, has no collateral. For this reason, they typically also have a higher interest rate and lower credit limit.
• Home Equity Line of Credit (HELOC): a HELOC is a line of credit that is backed by the market value of your home, where the amount of credit is determined based on the value of your home minus the amount due on your mortgage. The credit limit for a HELOC can go up to 80% of that value. HELOCs are a secure line of credit with a lower interest rate, since the value of the home represents significant collateral for the lender. However, unlike personal lines of credit that can be issued indefinitely, HELOCs usually have a drawing period of 10 years.
• Business Line of Credit: for a business LOC, the financial institution will assess the health of the business (profitability, market value, etc) and will grant a line of credit based on the risk. Depending on how much credit the business is asking for, these LOCs can be secured or unsecured, and can have varying interest rates.
• Demand Line of Credit: in this case, the lender can ask for the borrowed amount to be paid back at any time. Depending on the terms of the LOC, this payment can constitute just interest or interest and principal. 
• Securities-Backed Line of Credit (SBLOC): in the case of SBLOCs, the borrower’s securities represent the collateral asset. The credit amount an investor can borrow is based on the value of all their assets, but the borrower cannot use the line of credit to buy or trade more securities. 

How Line of Credit Loans are Handled:

Different types of lines of credits operate differently based on whether or not they have collateral and whether or not their funds reset after payments are made. Here are four categories lines of credit can fall under: 

• Unsecured Line of Credit: there is no collateral on this type of credit, meaning there is no asset securing it. For this reason, unsecured lines of credit typically have higher interest rates. 
• Secured Line of Credit: in this case, you are using an asset (a car, for example) as collateral for your line of credit. Secured lines of credit usually have lower interest rates, as the lender can take possession of your asset if you don’t repay them. 
• Revolving Line of Credit: this line of credit remains available even after you pay off the amount you borrowed. A credit card or a HELOC are the best examples of a revolving line of credit.
• Non-Revolving Line of Credit: this type of line of credit does not replenish after you’ve paid it off. A personal line of credit is typically non-revolving; the account closes once you’ve made all your payments. 

Mortgage Loan vs HELOC: What’s the Difference?

In Canada, a mortgage loan and a Home Equity Line of Credit (HELOC) are both common forms of financing for homeowners. However, there are significant differences between these two types of loans. A mortgage loan is a long-term loan used to finance the purchase of a property. It is secured by the property itself and typically has a fixed interest rate and payment terms. The borrower makes regular monthly payments towards the principal and interest over a specified period, usually 25 years. The primary purpose of a mortgage loan is to provide funding for the initial purchase or refinancing of a property.

On the other hand, a HELOC is a revolving line of credit that allows homeowners to borrow against the equity in their property. Unlike a mortgage loan, a HELOC provides access to funds that can be used for various purposes, such as home renovations, debt consolidation, or emergency expenses. The interest rate for a HELOC is usually variable and tied to the prime lending rate. Borrowers can access funds as needed, up to a predetermined credit limit, and only pay interest on the amount borrowed. The repayment terms for a HELOC are typically more flexible than a mortgage loan, with minimum monthly payments required.

How to Apply for a Loan:

Based on their purpose, the processes for applying to different types of loans can vary significantly. Here’s how to apply to the most common types of loans in Canada. 

• Applying for a mortgage: You can apply for a mortgage by approaching a financial institution or a licensed lender, such as nesto. It is advisable to do some research and shop around for the best mortgage rates and terms. This can be done by contacting multiple lenders or working with a mortgage broker who can help find the best options for your specific needs. Once you have chosen a lender, you will need to fill out an application form and provide all the required documents. The lender will then review your application and assess your financial situation to determine whether you qualify for a mortgage loan. If approved, you will receive a loan offer with the terms and conditions outlined. Once accepted, the lender will proceed with processing the loan and finalizing the mortgage agreement.
• Applying for an automobile loan: Much like a mortgage, it is important to research different lenders and compare their interest rates and terms. This will help you find the most suitable loan option for your needs. Once you have chosen a lender, complete the loan application form and submit it along with the necessary documents. The lender will then review your application and make a decision based on your creditworthiness and financial situation. If approved, you will receive the loan amount, which can be used to purchase your desired automobile.
• Applying for a debt consolidation loan: It is crucial to research and approach different lenders for a debt consolidation loan. Getting approved for a consolidation loan can be difficult if you are behind on payments or have a poor credit score, so be sure to assess all your lender options before making a decision.
• Applying for a home improvement loan: These types of loans may or may not be secured by a collateral and thus, can be secured or unsecured loans. Whether you approach a bank or other financial institution, be sure to research your options in loan terms and interest rates, especially when hoping to add value to your home.
• Applying for a student loan: Start by researching the different student loan options available from both government and private lenders. It is crucial to consider the interest rates, repayment terms, and eligibility criteria before making a decision. Remember that the loan amount will depend on the parents’ financial situation, but that the student is the one who will have to repay it.  
• Applying for a business loan: As with any loan, first research different lenders and compare their interest rates, terms, and loan amounts. This will help you choose the best option for your specific needs. Once you have selected a lender, fill out their application form and provide all required information. It is important to be thorough and accurate in your application to increase your chances of approval. Finally, be prepared for a thorough review process, which may include a credit check and evaluation of your business’s financial stability. 

How to Get a Line of Credit:

You can apply for a line of credit with your bank or financial institution. These institutions have specific requirements and procedures in place to assess an individual’s creditworthiness and determine the maximum limit on the line of credit.

During the application process for a line of credit, be ready to provide your institution with the necessary documentation. This typically includes proof of income, identification documents, and a credit report. It is also important to have a good credit history, as this will greatly increase the chances of being approved for a line of credit.

Your application will be reviewed and, based on your financial situation and creditworthiness, you will be notified of the maximum limit on their line of credit. Once approved, you can then access their line of credit as needed. This can be done through online banking or by visiting a branch of the bank or financial institution. It is important to keep track of any outstanding balances on the line of credit, as interest will be charged on these amounts.

Frequently Asked Questions

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

Final Thoughts

A lot of Canadians are unclear about the difference between a home equity loan and a mortgage. While both options involve borrowing against the value of your home, there are key distinctions to consider. In this article, we broke down the nuances of home equity loans and mortgages, giving you a clear understanding of how they work and which one may be best for your needs. Whether you’re a first-time buyer or a seasoned homeowner, we hope the guide helped demystify the world of home financing. If you have any more questions or are interested in starting your own home financing journey, our mortgage experts are here to help you with all your home buying needs.

---