HELOC vs Refinance: Which One Is Right for You?
If you own a home on Vancouver Island and need to access your equity, you have two primary options: a home equity line of credit, or a mortgage refinance. Both accomplish the same basic goal. They work very differently, and choosing the wrong one can cost you significantly.
Here is a clear breakdown of how each works, when each makes sense, and how to decide which is right for your situation.
What Is a HELOC?
A home equity line of credit is a revolving credit facility secured against your home. Like a line of credit or credit card, you can borrow, repay, and borrow again up to your credit limit. The limit is typically set at up to 65% of your home's appraised value, and when combined with your mortgage balance, your total debt cannot exceed 80% of your home's value.
HELOC interest rates in Canada are variable, typically set at prime plus a small margin. They move with the Bank of Canada's overnight rate.
The key feature of a HELOC is flexibility. You access what you need when you need it. You only pay interest on what you have drawn. There is no fixed amortization — minimum payments are interest-only, though you can pay down the principal at any time.
What Is a Mortgage Refinance?
A mortgage refinance replaces your existing mortgage with a new one. The new mortgage can be larger than your current balance, allowing you to access the difference as cash. You can refinance up to 80% of your home's appraised value.
Unlike a HELOC, a refinance gives you a lump sum. You pay interest on the full amount from day one, and the debt is amortized over a set period. Refinancing typically involves a new mortgage registration, which means legal fees and, if you refinance before your current term ends, a prepayment penalty.
The Key Differences
The fundamental difference is structure. A HELOC is flexible and revolving. A refinance is fixed and amortized.
A HELOC works better when: you need access to funds over time rather than all at once, you want flexibility to draw and repay as your needs change, you plan to use the equity for the Smith Manoeuvre or other ongoing investment strategies, or you want to preserve your current mortgage rate and terms.
A refinance works better when: you need a specific large lump sum, you want a fixed rate and a structured repayment timeline, you are consolidating high-interest consumer debt into a single lower-rate payment, or you are making significant structural changes to your mortgage at the same time.
The Penalty Question
This is where many homeowners get surprised. If you want to access equity and you are not at your mortgage maturity date, a refinance requires breaking your current mortgage term. This triggers a prepayment penalty.
For variable rate mortgages, the penalty is typically three months of interest. For fixed rate mortgages, it is the greater of three months of interest or the Interest Rate Differential, which can be very large depending on how far rates have moved since you took out your mortgage. On a $600,000 fixed-rate mortgage, an IRD penalty can easily reach $15,000 to $25,000.
A HELOC, if it was set up as part of your original mortgage or added at renewal, does not trigger this penalty. You simply draw from the available credit.
This is why timing matters. If your mortgage is coming up for renewal, refinancing at maturity avoids the penalty entirely. If you need access to equity mid-term, a HELOC is almost always the less expensive path.
Rate Considerations
HELOC rates are variable and currently sit roughly 1.5% to 2% above a typical 5-year fixed mortgage rate. This matters if you are planning to carry a large balance for an extended period.
If you need to access a significant amount of equity and plan to hold it for many years, a fixed-rate refinance might offer a lower overall cost of borrowing despite the initial setup costs. If you are using the equity for the Smith Manoeuvre, a HELOC's variable rate and flexibility generally make it the right structure, because the tax deductibility of the interest partially offsets the rate premium.
Which One Is Right for You?
There is no universal answer. The right choice depends on why you need the equity, how much you need, when you need it relative to your mortgage maturity date, and what you plan to do with it.
I help homeowners across Vancouver Island think through this decision clearly. Book a free call and I will look at your specific mortgage, equity position, and goals. I will give you a straightforward recommendation based on your actual numbers, not a generic rule of thumb.
Book a free consultation or call (250) 218-4135.
Dean Garrett
Mortgage Professional
