It’s not really a rate question

Fall is renovation season, and the question I hear most often goes like this: “Should I refinance, or just get a line of credit?”

People usually ask it as if the answer comes down to which one has the lower rate. It rarely does. What decides it is when you need the money, what it costs to touch your current mortgage, and how the money gets paid back.

A homeowner I worked with recently had a good plan. They set up a line of credit secured on the home, used it to pay the contractors as each stage of the renovation was finished, and planned to move the balance into a regular mortgage once the work was done. They only paid interest on what they’d actually drawn while the work was underway, and they ended up with a fixed payment and a payoff date afterwards.

That combination won’t suit everyone, but it shows how the two tools differ.

Same equity, two different tools

A home equity line of credit (HELOC) is a revolving line of credit registered against your home. You draw what you need, when you need it, and pay it back and re-borrow as often as you like. The minimum payment is usually interest only, and the rate moves with prime.

A refinance replaces your current mortgage with a new, larger one. You get the money in one lump sum on closing, and you repay it with a regular payment that covers interest and principal, so the balance goes down every month until it’s gone.

One stays open. The other pays itself off.

The limits, in plain terms

In Canada, you can generally borrow up to 80% of your home’s value in total, counting your mortgage and any line of credit together. Within that, no more than 65% of the value can sit in a revolving line of credit. Anything you borrow between 65% and 80% has to be on an amortizing mortgage that gets paid down.

Here’s a round-number example. Your home is worth $1,000,000.

• 80% total: $800,000 across everything secured on the home.
• 65% revolving: up to $650,000 of that can be a line of credit.
• If you owe $400,000 on your mortgage, you have up to $400,000 of room, and all of it could be set up as a line of credit.
• If your home is paid off, you could still borrow up to $800,000, but only $650,000 could be a line of credit. The other $150,000 would have to be a mortgage.

The 80% is a ceiling, not a target. What you can actually borrow also depends on your income and debts.

What touching your mortgage costs

This is where many renovation plans go wrong. Refinancing in the middle of your term means breaking your current mortgage. On a variable rate, that usually costs three months’ interest. On a fixed rate, it’s usually the greater of three months’ interest or the interest rate differential (IRD), which can easily reach five figures. We walked through how that’s calculated in a recent article on what it costs to break your mortgage.

Before you break anything, look at the alternatives:

• Blend and increase. Some lenders will add new money to your existing mortgage and blend your current rate with today’s rate, without a penalty.
• A second segment. If your mortgage is already set up with a line of credit or multiple segments, you may be able to add a new portion with your current lender without breaking the existing one.
• A HELOC now, a refinance later. Fund the work with a line of credit, then fold the balance into your mortgage at renewal, when there’s no penalty.
• Wait for renewal. If you’re within a year of maturity, timing the work around it can save you the penalty entirely.

When a HELOC fits

A line of credit makes sense when:

• Your costs come in stages, and you’d rather not pay interest on money still sitting in your account.
• You expect to pay the balance back fairly quickly, from a bonus, a sale or savings.
• You’re disciplined about paying more than the minimum.

The risk is simple. An interest-only minimum payment means the balance never has to go down. Many people find themselves carrying the same balance years later at a variable rate. Lenders also differ on whether they’ll ever lower the rate on a line of credit once it’s set up. Some will renegotiate it, others won’t, so ask before you sign.

When a refinance fits

A refinance tends to make more sense when:

• You need one larger sum up front, for example to pay a contractor’s deposit and fixed contract.
• You want a fixed payment and a clear payoff date.
• You’re close to renewal anyway, so the penalty is small or nil.
• You also want to roll higher-interest debt into a single payment.

The secondary suite exception

Normally, a refinance can’t be mortgage-insured. Your existing insured mortgage can still be refinanced, but the new, larger loan won’t be insured. There is one exception. Since January 15, 2025, homeowners adding a secondary suite (a basement apartment or a garden suite, for example) can get an insured refinance for up to 90% of the home’s value once the work is done, on homes worth under $2 million, with up to a 30-year amortization.

If you’re thinking about adding rental income to your home, this is worth a conversation before you choose a product.

Before you choose, have these ready

• Your current balance and maturity date.
• A penalty quote from your lender. Ask for it in writing.
• Your renovation budget and timeline, including when each payment is due.
• How you plan to pay the money back.
• Whether you’ll want to borrow again later.

Start with the penalty number

The right answer depends on your term, your penalty and your plans, not on whichever headline rate is lower this week. Get your penalty number first. Then the choice usually becomes obvious.

If you’re planning a renovation and want to look at the options side by side, I’m happy to go through them with you.

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