A home equity line of credit is one of the most flexible and affordable borrowing tools available to Canadians — but it's not risk-free. The same features that make HELOCs attractive (low rates, flexibility, large limits) also create risks that can compound over time. Here's an honest assessment of what can go wrong.
HELOCs in Canada are always variable rate, tied to the prime rate. When the Bank of Canada raises rates — as it did aggressively from 2022 to 2023 — your payments increase automatically. A borrower with a $200,000 HELOC balance who saw rates rise by 4% (as happened 2022–2023) saw their monthly interest cost increase by roughly $667/month.
The minimum payment on most HELOCs is interest only. This means your balance never decreases if you only pay the minimum. Canadians who draw $100,000 from a HELOC and pay only interest for 10 years will have paid ~$54,500 in interest — and still owe $100,000. This is the most common HELOC trap.
Unlike credit card debt, a HELOC default can trigger foreclosure or power of sale proceedings. If you lose your job, face a health crisis, or go through a divorce while carrying a large HELOC balance, you may be forced to sell your home to repay the debt.
Many Canadians don't realize that lenders can reduce or freeze their HELOC at any time, particularly during a housing downturn. If your home value drops and your LTV climbs above the lender's threshold, they may freeze the available credit or demand partial repayment. This happened to some US homeowners in 2008–2009 and to a lesser extent in Canada during volatile periods.
The ease of accessing a HELOC — a few taps in your banking app — can encourage treating home equity as an ATM. Renovations expand in scope. Vacations get funded. Luxury purchases creep in. Over time, a HELOC that was meant for responsible purposes becomes a lifestyle subsidy, with the balance growing rather than shrinking.
If Canadian housing values decline significantly — as they did in some markets in 2022–2023 — and you've borrowed near the 80% LTV limit, you could find yourself in negative equity. This doesn't immediately force a sale, but it restricts your options: you can't sell without bringing cash to the table, and you can't access more equity.
| Risk | Severity | Likelihood | Best Mitigation |
|---|---|---|---|
| Variable rate rises | Medium | Medium | Stress test; lock portion |
| Interest-only debt trap | High | High | Automatic principal payments |
| Home loss on default | Severe | Low (with stable income) | Emergency fund; don't over-borrow |
| Lender freeze | Medium | Low–Medium | Don't rely on HELOC as emergency fund |
| Over-borrowing | Medium | Medium | Use only for planned purposes |
| Negative equity | Medium | Low–Medium | Maintain 70% or lower combined LTV |
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Get KOHO Free — Use Code 45ET55JSYAYes — most HELOC agreements give lenders the right to reduce or freeze the credit limit with relatively short notice. Read your HELOC agreement carefully; this clause is usually present.
Missing payments damages your credit score and triggers late fees. Consistent missed payments can lead to the lender issuing a demand letter, and eventually, collection or foreclosure proceedings. Contact your lender immediately if you're struggling — most will work with you proactively.
In terms of rate risk, a HELOC (variable) can be riskier than a fixed second mortgage during rising rate environments. In terms of lender flexibility and prepayment, a HELOC is generally more borrower-friendly.