Home Equity Line Of Credit vs. Mortgage: Which Is Better?

People often think of retirement as a time to take it easy and enjoy the fruits of their labor. Now that they don’t have to work, retired people often look for new ways to stay busy, active, and happy. One common way to do this is to buy a house that fits their needs now that they are retired. Some retirement communities have activities like golfing, swimming, and other fun things to help retirees stay active and make new friends. Also, there are financial benefits to owning a home, such as the chance that its value will increase and has the ability to build equity. When you think about these things, it’s unsurprising that many retirees look for homes that can give them comfort and fun in their golden years.

In addition to the reasons abovementioned, buying a house in retirement can also help retirees feel independent and in control. By owning their own home, retirees can make their living space look and feel exactly how they want. This can give them a sense of pride and ownership that they might not get from renting or living in a retirement community. Furthermore, this can give retirees more options and freedom regarding their living situations. For example, they might decide to move entirely to a smaller home or somewhere else.

However, for some retirees, it can be difficult to live on fixed incomes. Other things that can aggravate retirees’ financial stress are insufficient savings, smaller pensions, and longer retirements. Because of this, several Canadian retirees are looking to tap into the equity they’ve accumulated in their home so their financial situation can be more desirable. However, they have a difficult time choosing between a mortgage and a home equity line of credit. Rest assured, we will elaborate on these two here in this article to give you a more informed decision about what’s best for you.

There are over three million HELOC accounts in Canada that have an average outstanding balance of $70,000. Mortgages are obviously used more widely in Canada than HELOCs. But, sometimes, a HELOC may be considered the better option than a typical mortgage. Let’s look into greater detail and decide where Canadians see themselves in this home equity line of credit vs. mortgage showdown.

What is a Mortgage?

Retirees can take out a mortgage loan to buy a house, but it depends on their finances, goals, and priorities as to how often they do this. Some retirees may choose to get a mortgage loan to buy a home, especially if they don’t have enough savings or income to buy the property outright. They might also want to use some of their savings for other things, like investments or travel, instead of putting it all into a house.

A mortgage loan or simply mortgage is the original loan that a financial institution, like a bank, lends borrowers money to help them buy their house. In many cases, the bank can lend up to 80% of the house’s purchase price or appraised value. For instance, if you purchase a house that has been appraised at about $240,000, you can be eligible for a mortgage loan of approximately $192,000. This means that you’ll need to find a way to fill out the rest of the $48,000 by yourself. Other mortgages, like FHA mortgages, enable you to furnish a lot less than the usual 20% down, so long as the mortgage insurance is paid.

Mortgage interest rates can either be fixed or variable. The loan amount is repaid by the borrower along with interest over the fixed-term, with the main recurring terms being 30 or 15 years.

If you’re behind on your payments, the lender will occupy your house via a process called foreclosure. And in order to recoup the money, the lender will sell the house, typically at an auction. If this ever happens, the mortgage will take greater priority over other loans made against the house afterward, including a home equity loan, or home equity line of credit (HELOC). The first lender has to be paid completely before the subsequent lenders can get any of the proceeds from the foreclosure sale.

But it is also important to note that getting a mortgage loan as a retiree can be more challenging because lenders may see them as higher-risk borrowers because of their age and possibly lower income. For a mortgage loan, retirees may also need to show proof of their retirement income or assets.

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In Canada, a home equity loan is a general term that can describe several types of loans where borrowers can use their home’s equity as collateral. In Canada, home equity loans offer bigger amounts and interest rates that are lower than unsecured loans, since the property is being used as collateral. Other types of benefits that come with a home equity loan include flexible repayment options. Plus, they are the only options available when unsecured loans aren’t available.

Sometimes a home equity loan can also be termed as a second mortgage. That means that besides the primary mortgage that needs to be paid out in case of a foreclosure or sale, there’s also a second mortgage that needs to be paid out after that. The amount that the people borrow depends on the amount that they’ve accumulated in the equity of their house.

A HELOC works similarly to a credit card in that it permits homeowners to borrow up to a set amount, which is frequently a portion of the equity in their property. They can then use the money as needed and repay the money they borrowed over a certain period of time, plus interest.

For retirees with substantial home equity who need access to cash for home repairs, medical bills, or other unexpected expenses – HELOCs might be a practical choice. They can also be utilized to pay off high-interest debt or to support significant expenses like house renovations.

Then there are home equity lines of credit, which works separately than home equity loans. It works similar to a credit card where you borrow a specific amount of your house’s equity and then slowly repay the amount after some time. They’re also similar to a second mortgage.

HELOCs are growing every year amongst Canadians. The consumers can use as little or even as much as they require, so long as they abide by their credit limit and ensure their account maintains a good standing. HELOCs also come with flexible repayment terms where borrowers are allowed to make interest-only payments outstanding balance. This means you pay interest on only the amount of equity that you use.

Like a conventional mortgage, a home equity loan is repaid over a fixed-term. Various lenders have various sets of standards about the home equity percentage they’re willing to lend. What’s more, is that the borrower’s credit also plays an essential role in this process.

Also, it is crucial to remember that HELOCs do include some dangers. The borrower risks losing their home through foreclosure if they don’t make the required payments. HELOC interest rates are also variable, which means that they can change over time and possibly make the costs less predictable.

Lenders will use the borrower’s loan-to-value (LTV) ratio to determine how much money they are permitted to borrow. To calculate LTV, you’ll need to first add the amount you wish to borrow to the amount you still owe your house and then divide it by the house’s appraised value. Whatever value you get, will be your LTV ratio. If you’re likely going to get a good portion of your mortgage paid down – or if the value of your house has risen considerably – you may be able to get a decent amount of loan.

In the end, you are the ultimate decider of this home equity line of credit vs mortgage Canada feud.

If you’re pretty savvy with your online searching abilities, you can also find credible HELOC aggregators to help you out.

Qualifying for a Home Equity Line of Credit

It may be more challenging to qualify for a HELOC than for other types of loans since lenders frequently demand that borrowers fulfill certain requirements. If a home equity line of credit is what you’ve decided upon, then you’ll need to do the following in order to qualify for it:

  • A 20% minimum equity or down payment, or

  • A 35% minimum equity or down payment if you decide on using a stand-alone HELOC to substitute a mortgage.

And before your lender can approve you for a HELOC, they’ll require you to have:

  • A good credit score

  • Acceptable debt levels compared to your income

  • Proof of stable and sufficient income

If you want to qualify for a HELOC at a bank, you’ll need to pass a “stress test.” This means that you have to prove that you’re able to afford all of the payments at an interest rate that helps you qualify, which is typically more than the original rate stated in your contract.

The stress test can also be used by credit unions and other types of lenders who aren’t federally regulated if you’re looking to apply for a HELOC. Although it’s not necessary that they should.

In most countries, HELOCs do not require that they undergo the same stress tests as traditional mortgages. Regulators usually use stress tests to determine how likely borrowers will be able to pay back their mortgages if something bad happens to their finances, like a big interest rate increase or a recession.


So to put this line of credit vs mortgage quarrel to bed, the choice ultimately falls on you. Although, if you ask us, a HELOC offers many benefits, if combined with the right strategy and financial goals. For instance, if you’re buying an investment property for a short time period and are planning to sell it later on, then a HELOC would be a much more suitable option for this thanks to its open and flexible terms.