The equity sitting in a property you already own is one of the most common ways Canadian investors fund their next down payment. The two main ways to pull it out, a home equity line of credit or a cash-out refinance, work very differently, and picking the wrong one for your situation can quietly cost you thousands in interest or leave you exposed to a rate you did not plan for.
Here is how each actually works, and a framework for deciding which one fits your next purchase.
How a HELOC works
A home equity line of credit is a revolving credit facility secured against your property, typically up to a combined 65% to 80% loan-to-value depending on the lender and whether it sits alongside an existing mortgage. You draw only what you need, pay interest only on the drawn balance, and can pay it down and redraw again, similar to a credit card secured by your home. Rates are usually variable, tied to prime.
How a cash-out refinance works
A cash-out refinance replaces your existing mortgage entirely with a new, larger one, up to the maximum loan-to-value your lender allows, and gives you the difference in cash at closing. You get a fixed or variable amortizing loan on the full new balance, not a revolving line, and you requalify for the entire mortgage at current rates and underwriting rules, not just the new portion.
| Factor | HELOC | Cash-out refinance |
|---|---|---|
| Rate type | Typically variable, tied to prime | Fixed or variable, your choice |
| Payment structure | Interest-only on drawn balance is common | Fixed amortizing payment on the full balance |
| Qualifying | Qualify on the line itself | Requalify on the entire new mortgage |
| Existing mortgage rate | Untouched, stays in place | Replaced, you lose a good existing rate |
| Flexibility | Draw and repay repeatedly | One lump sum at closing |
When a HELOC tends to make more sense
If your existing mortgage is at a rate meaningfully better than what is available today, a HELOC lets you access equity without disturbing that rate on the rest of the balance. It also suits an investor who is not certain exactly how much capital the next deal will need, since you only draw and pay interest on what you actually use.
When a cash-out refinance tends to make more sense
If your existing rate is close to or worse than current rates anyway, or you are already near a scheduled renewal, a cash-out refinance lets you access a known lump sum at a fixed, predictable payment rather than a variable rate exposed to future prime rate moves. It also avoids stacking a second variable-rate facility on top of an existing mortgage.
The risk both options share
Either way, you are increasing total leverage across your portfolio, not just on the property you are buying. Before you draw on either facility, run the resulting DSCR and cash flow on both the source property, with its new, larger debt load, and the target property, at your actual qualifying rate, not just the promotional rate. See CMHC versus conventional financing for how the down payment source interacts with your financing options on the new purchase.
Model both properties together before you draw a dollar of equity.
This post is for informational purposes only and does not constitute financial or mortgage advice. Loan-to-value limits, rates, and qualifying rules vary by lender and change over time. Consult a licensed mortgage professional before making any financing decision.