HELOC vs Refinance: Which Is Right for You?

You need to access $60,000 in home equity for a kitchen renovation, debt consolidation, or investment property down payment. You have two main options: refinance your mortgage to pull the equity out, or set up a Home Equity Line of Credit (HELOC). Both let you access the same equity, but they work completely differently and have very different cost structures.

Choosing wrong can cost you thousands in unnecessary interest or penalties. Choosing right gives you the equity you need at the lowest cost with maximum flexibility.

This guide breaks down HELOC vs refinance: how each works, what each costs, and when to use which option.

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured against your home equity. Think of it as a credit card secured by your house, but with much lower interest rates.

How a HELOC Works

You get approved for a credit limit based on your available equity (up to 65% of home value as a standalone HELOC, or up to 80% combined with your mortgage).

You borrow what you need, when you need it. You do not take the full amount upfront — you draw funds as required.

You pay interest only on what you use. If you have a $75,000 HELOC but only use $20,000, you pay interest on $20,000.

You can repay and re-borrow. As you pay down the balance, that credit becomes available again. It is revolving, like a credit card.

Example:

• Home value: $600,000
• Mortgage balance: $350,000
• HELOC limit: $130,000 (80% of $600,000 = $480,000, minus $350,000 mortgage)

You draw $40,000 for a renovation. You pay interest only on $40,000. Once the renovation is done and you start repaying, you can re-borrow for future needs.

What Is Mortgage Refinancing?

Refinancing means breaking your existing mortgage and replacing it with a new, larger mortgage. You receive the difference in cash.

How Refinancing Works

You increase your mortgage balance. Your old mortgage is paid out, and a new mortgage is registered for a higher amount.

You receive a lump sum. The difference between your old mortgage and new mortgage is deposited to your account.

You make fixed payments. Your new mortgage payment covers principal and interest, just like your original mortgage.

Example:

• Home value: $600,000
• Current mortgage: $350,000
• You refinance to: $410,000
• You receive $60,000 cash (minus refinancing costs)

Your mortgage payment increases from $2,287/month (on $350,000 at 4.8%) to $2,680/month (on $410,000 at 5.2%).

HELOC vs Refinance: Side-by-Side Comparison

When to Choose a HELOC

1. You Are Not Sure How Much You Will Need

Scenario: You are planning a kitchen renovation. The quote is $45,000, but it might go to $55,000 if you upgrade appliances or discover issues during demolition.

Why HELOC: You set up a $70,000 HELOC and draw only what you need. If the renovation costs $48,000, you pay interest on $48,000, not $70,000.

2. You Want to Avoid Breaking Your Mortgage

Scenario: You are 18 months into a 5-year fixed mortgage at 4.6%. Breaking would trigger a $9,500 IRD penalty. You need $35,000 for debt consolidation.

Why HELOC: Setting up a HELOC does not require breaking your mortgage. Your mortgage stays untouched, you avoid the penalty, and you access the equity you need.

3. You Might Need Access Again in the Future

Scenario: You are pulling $30,000 now for a vehicle purchase, but you might need another $20,000 in 18 months for your kid's university tuition.

Why HELOC: You draw $30,000 now, make payments, and when you need $20,000 later, you draw again. No need to refinance twice.

4. You Plan to Repay Quickly

Scenario: You are buying an investment property and need $50,000 for the down payment. Your current home is selling in 90 days, and you will use the sale proceeds to repay the $50,000.

Why HELOC: You use the HELOC for 3 months, pay interest only, then repay in full when your home sells. Total interest cost: approximately $800 to $1,000 (vs refinancing costs of $10,000+).

When to Choose Refinancing

1. You Want the Lowest Possible Interest Rate

Scenario: You need $75,000 for a major home addition. You will carry this debt for 5+ years.

Why refinance: Mortgage rates (4.8% to 5.2%) are 1.5% to 2.0% lower than HELOC rates (6.5% to 7.0%). Over 5 years on $75,000, this saves you approximately $6,000 to $9,000 in interest.

2. You Need Forced Repayment Discipline

Scenario: You are consolidating $50,000 of credit card debt. You know yourself — if you have access to re-borrow on a HELOC, you will use it and get back into debt.

Why refinance: The $50,000 is added to your mortgage with a fixed amortization (25 years). You make monthly principal + interest payments, forcing you to pay it down. No option to re-borrow.

3. You Are at Mortgage Maturity (No Penalty)

Scenario: Your mortgage term is ending in 60 days. You need $40,000 for debt consolidation.

Why refinance: At maturity, there is no penalty to refinance. You can increase your mortgage by $40,000, lock in a competitive rate for 5 years, and avoid the higher HELOC rate. Total cost: $1,200 to $1,500 (legal and appraisal only).

4. You Want Payment Certainty

Scenario: You need $60,000 and you budget tightly. You want to know exactly what your payment will be every month for the next 5 years.

Why refinance: Your mortgage payment is fixed (if you choose a fixed rate). A HELOC is variable — if Prime rate increases 1.0%, your payment increases proportionally. Fixed refinance gives you payment certainty.

Cost Comparison: Real Calgary Example

Profile:

• Home value: $580,000
• Current mortgage: $320,000 at 4.9%, 28 months remaining
• Need to access: $50,000

Option 1: Refinance

New mortgage: $370,000 at 5.2% (current rate) Monthly payment: $2,419 (vs $2,090 old payment = $329 increase)

Costs:

• IRD penalty: $8,200
• Legal fees: $1,200
• Appraisal: $400
• Total upfront cost: $9,800

Total cost over 5 years:

• Interest on $50,000 at 5.2%: approximately $13,000 (declining as you pay principal)
• Upfront costs: $9,800
• Total: $22,800

Option 2: HELOC

HELOC: $50,000 at Prime + 0.5% = 6.5% Monthly payment (interest-only): $271

Costs:

• Setup fee: $0
• Appraisal (may be required): $400
• Total upfront cost: $400

Total cost over 5 years (interest-only, no repayment):

• Interest on $50,000 at 6.5%: approximately $16,250
• Upfront costs: $400
• Total: $16,650

HELOC saves $6,150 in this scenario because you avoid the $8,200 penalty.

However: If you were at maturity (no penalty), refinancing would cost $14,200 total ($13,000 interest + $1,600 costs), making refinance cheaper than HELOC by $2,450.

The decision depends on your penalty.

The Readvanceable Mortgage: Best of Both Worlds

Many Calgary homeowners use a readvanceable mortgage structure that combines a mortgage and HELOC in one registered product.

How It Works

You have two components registered together:

• First component: Fixed or variable rate mortgage (e.g., $320,000 at 4.8%)
• Second component: HELOC (e.g., $80,000 limit at Prime + 0.5%)
• Combined total: Cannot exceed 80% of home value

As you pay down your mortgage, your HELOC limit automatically increases. If you pay $10,000 in principal, your HELOC availability increases by $10,000.

Example:

• Home value: $600,000 (80% = $480,000 max combined limit)
• Mortgage: $350,000
• HELOC: $130,000 limit (currently $0 drawn)
• Combined: $480,000

After 5 years, your mortgage is paid down to $310,000. Your HELOC limit automatically increases to $170,000 (because the combined total can still be $480,000).

Popular readvanceable products in Canada:

• Scotia STEP (Scotiabank)
• Manulife One
• TD Home Equity FlexLine
• National Bank All-in-One

Advantages:

• Set up once, access both components as needed
• As you pay down the mortgage, HELOC room grows automatically
• Flexibility to choose which component to use based on need

Disadvantages:

• Complexity (requires financial discipline)
• Temptation to over-borrow
• HELOC portion has higher rate than mortgage portion

HELOC Interest Rates: How They Work

HELOC rates are variable and tied to the lender's Prime rate.

Current Prime rate in Canada: 6.0% (as of early 2025)

HELOC rates:

• Big banks: Prime + 0.5% to Prime + 1.0% = 6.5% to 7.0%
• Credit unions: Prime + 0.25% to Prime + 0.75% = 6.25% to 6.75%
• Monoline lenders: Prime + 0.5% = 6.5%

When Prime rate changes, your HELOC rate changes immediately.

Example:

• You have a HELOC at Prime + 0.5% (currently 6.5%)
• Bank of Canada raises rates, Prime goes to 6.5%
• Your HELOC rate is now 7.0%
• Your monthly interest cost increases proportionally

This is the primary risk of HELOCs: rate volatility. If rates increase 2.0% over 3 years, your interest cost increases significantly.

HELOC Repayment Strategies

The biggest mistake HELOC users make is paying interest-only forever and never reducing the principal.

Minimum Payment Trap

If you borrow $50,000 on a HELOC at 6.5% and only make the minimum interest-only payment ($271/month), you will never pay it off. You will pay $271/month forever.

Better strategy:

Strategy 1: Set a Forced Repayment Schedule

Treat your HELOC like a mortgage. Calculate what the payment would be if you amortized it over 10 years and pay that amount.

Example:

• HELOC balance: $50,000
• Rate: 6.5%
• 10-year amortization payment: $568/month

Pay $568/month instead of the $271 minimum. Your HELOC is paid off in 10 years, and you save tens of thousands in interest compared to paying interest-only.

Strategy 2: Use for Short-Term Needs Only

Only use your HELOC for expenses you can repay within 12 to 24 months. If the need is longer-term, refinance into a mortgage at a lower rate.

Strategy 3: Pay Lump Sums When Possible

Any bonus, tax refund, or windfall goes toward the HELOC. Because it is revolving, you can always re-borrow if you need the funds later.

Tax Deductibility: When HELOC Interest Is Tax-Deductible

In Canada, interest on borrowed money is only tax-deductible if the funds are used to earn investment income.

HELOC interest IS deductible if you use the funds for:

• Down payment on a rental property
• Investing in stocks, bonds, mutual funds (non-registered account)
• Business purposes (buying equipment, inventory, etc.)

HELOC interest IS NOT deductible if you use the funds for:

• Personal renovations
• Debt consolidation
• Vehicle purchase
• Vacation
• Anything in a TFSA or RRSP (those are registered accounts)

Important: Keep meticulous records. If you use your HELOC for multiple purposes, track which portion was for investment (deductible) and which was for personal use (non-deductible).

Calgary Market Considerations

Strong Home Equity Growth

Calgary home prices increased 12% in 2024. Homeowners who bought 3 to 5 years ago have significant equity, making both HELOC and refinance options accessible.

Competitive HELOC Market

Alberta credit unions often offer better HELOC rates than big banks (Prime + 0.25% vs Prime + 1.0%). Shop around.

No Land Transfer Tax

Refinancing in Calgary does not trigger land transfer tax (unlike Ontario or BC), keeping refinancing costs lower and making refinance more competitive with HELOC in penalty-free scenarios.

Which Should You Choose?

Choose HELOC if:

• You want to avoid breaking your mortgage (high penalty)
• You need flexible access over time (uncertain amount needed)
• You plan to repay within 1 to 3 years
• You value the ability to re-borrow

Choose Refinance if:

• You are at mortgage maturity (no penalty)
• You want the lowest interest rate for long-term borrowing
• You need forced repayment discipline
• You prefer fixed payments and rate certainty

Choose a readvanceable mortgage (both) if:

• You want maximum flexibility
• You have strong financial discipline
• You can benefit from both a low-rate mortgage and flexible HELOC access

FAQ: HELOC vs Refinance

Q: Can I have both a HELOC and refinance at the same time? A: Yes, through a readvanceable mortgage structure. You have a mortgage component and a HELOC component, both registered against your home.

Q: Is HELOC interest tax-deductible? A: Only if the borrowed funds are used for investment purposes (rental property, stocks, business). Not deductible for personal use.

Q: Can I convert my HELOC balance into a fixed-rate mortgage? A: Yes. Many lenders allow you to convert all or part of your HELOC balance into a fixed-rate term. This locks in a lower rate and creates a forced repayment schedule.

Q: What happens to my HELOC if home prices drop? A: If your home value drops below 80% LTV (combined mortgage + HELOC), the lender may freeze your HELOC or reduce your limit. You keep access to what you have already borrowed, but you cannot draw more.

Final Thoughts

HELOC and refinancing both let you access home equity, but they serve different purposes. HELOC is flexibility and speed — higher rate, but no penalties and revolving access. Refinancing is long-term borrowing at the lowest rate — lower rate, but upfront costs and no re-borrowing.

The right choice depends on your timeline, penalty situation, and how you plan to use the funds. If you are unsure, talk to a mortgage broker who can calculate exact costs for both options based on your specific situation.

For more information on mortgage refinancing and renewal strategies, see the Ultimate Mortgage Renewal Guide for Alberta.

Questions about HELOC, refinancing, or accessing home equity? Contact Jay: jaysinghmortgage@gmail.com or 403.409.1126.