What is home equity?
Home equity is the difference between your property's market value and the outstanding balance on your mortgage. For example, if your home is worth $900,000 and you owe $500,000 on your mortgage, you have $400,000 in equity. That equity grows in two ways: as you pay down your mortgage principal each month, and as your property value appreciates over time.
In Canada, you can typically access up to 80% of your home's value (called a Loan-to-Value ratio or LTV of 80%) through traditional lending from regulated lenders. Some alternative lenders may offer higher LTVs up to 85-90%, but at higher rates. The remaining 20% equity acts as a buffer for the lender in case property values decline. If your home is worth $900,000, 80% LTV means you can access up to $720,000 total debt secured against the property. If you owe $500,000, you have $220,000 in accessible equity.
Three ways to access equity
Each method of accessing equity has different costs, benefits, and ideal use cases:
Replace your current mortgage with a larger one and take the difference in cash. This is a one-time lump sum payment. Best for large single expenses like major renovations, debt consolidation, or a significant purchase. Typical refinance costs include legal fees ($600-1,500), appraisal ($300-500), and potential prepayment penalties if you break your current term early. The advantage: you lock in a single fixed or variable rate for the full amount on a single payment schedule.
A revolving credit line secured against your home. You borrow what you need, when you need it, and only pay interest on the amount used. HELOCs offer maximum flexibility but typically have variable interest rates (prime + 0.5% to prime + 2%). Most HELOCs have a 10-year draw period followed by a 20-year repayment period. Ideal for ongoing or unpredictable expenses like phased renovations, investment opportunities, or as an emergency reserve.
A separate mortgage registered against your property, behind the first mortgage. Second mortgages generally have higher rates than first mortgages but offer a shorter term (1-5 years). They are often used when refinancing the first mortgage is not ideal — for example, if you have a very low rate on your first mortgage that you do not want to lose, or if you need funds quickly and a second mortgage can close faster than a refinance.
How lenders calculate available equity
Lenders use the lesser of the purchase price and the appraised value when calculating your LTV. If you bought your home for $700,000 and it is now worth $900,000, the lender uses the $900,000 appraised value. The calculation: maximum total debt = appraised value × 80% (or the lender's maximum LTV). Accessible equity = maximum total debt minus current mortgage balance. So for a $900,000 home with a $500,000 mortgage: $720,000 maximum debt - $500,000 current = $220,000 accessible equity at 80% LTV. Some lenders go to 85% LTV for HELOCs, which would increase accessible equity to $265,000 in this example.
Common uses for home equity
- Debt consolidation: Combining high-interest credit card debt (19-30%), auto loans, and unsecured lines of credit (8-15%) into a single lower-rate mortgage payment (4.5-7%). This is the most common reason Ontario homeowners access equity and often saves $500-2,000 per month in interest costs alone.
- Home renovations: Increasing your property value while financing the improvements. Renovations with the highest ROI (kitchen, bathroom, basement finishing) can add more value than they cost.
- Investment property down payment: Using equity from your primary residence to fund a rental property purchase. The interest on funds used for investment purposes may be tax-deductible.
- Education or major purchases: Funding large expenses at lower interest rates than unsecured borrowing. Rate comparison: mortgage refinance 4.5-6.5% vs. student line of credit 6-9% vs. credit card 19-30%.
- Emergency reserve: Setting up a HELOC as a standby liquidity source. You pay nothing unless you draw on it, but having it available provides financial flexibility.
Cost comparison
Interest rates vary significantly by product type, making it essential to choose the right tool for your needs. As of 2026, typical rates are:
- First mortgage refinance: 4.5-6.5% — the lowest cost option for lump-sum needs
- HELOC: Prime + 0.5% to Prime + 2% (typically 6-8%) — competitive for flexible access
- Second mortgage: 7-12% depending on lender type and LTV — higher cost but faster and preserves your first mortgage rate
- Credit cards: 19-30% — the most expensive option, avoid using for large expenses
- Unsecured lines of credit: 8-15% — no home required but significantly higher rates than secured options
Accessing home equity is almost always cheaper than unsecured borrowing, but it puts your home at risk if payments are not maintained. The rule of thumb: use home equity for things that build long-term value (renovations, investments, debt consolidation) rather than discretionary spending.
When to avoid accessing equity
Accessing home equity is not always the right move. Avoid it when the funds are for discretionary spending like vacations, luxury purchases, or lifestyle expenses — the risk of losing your home does not justify funding wants rather than needs. Also avoid tapping equity if you plan to sell within 2-3 years, as transaction costs will eat into any benefit. And never access equity to address spending habits without fixing the underlying behavior — consolidating debt that reaccumulates simply leaves you with more debt and less equity. A responsible plan always includes addressing the root cause.
