How Does a Home Equity Loan Work? A Clear Guide for Homeowners

If you’re a homeowner looking to access extra funds—maybe for renovations, debt consolidation, or a major life purchase—you’ve likely come across the term home equity loan. But how does a home equity loan work, and is it the right solution for your needs?

Let’s start with the basics. Your home equity is the portion of your property you truly own. It’s calculated by subtracting your current mortgage balance from your home’s market value. As outlined by the Financial Consumer Agency of Canada, this equity can be used to secure lending products like a home equity loan—a cost-effective way to borrow money at competitive rates.

Still, many homeowners are unclear on how equity loans function or how they compare to other financing tools. This guide clears up the confusion and helps you decide if it’s the right fit for your financial plans.

A home equity loan is a type of secured installment loan that allows you to access a portion of your home’s equity in one lump sum. It’s often referred to as a second mortgage, since it’s registered behind your existing mortgage and secured by your property.

This loan type comes with a fixed interest rate or variable interest rate, and allows you to access a larger dollar amount of your equity than a home equity line of credit (HELOC).

Home equity loans are versatile and can be used for almost any purpose. Many borrowers use them to consolidate high-interest debt, fund home renovations, cover large purchases like tuition or vehicles, or even invest in a business. Because the loan is secured against your home, it usually comes with lower rates than unsecured loans or credit cards.

There are no restrictions on how the funds are used, which makes this option ideal for homeowners looking to manage cash flow, reduce interest costs, or make a major financial move with confidence.

The amount you can borrow depends on your loan to value ratio (LTV)—essentially, how much of your home’s value is already financed through existing loans. Most mortgage lenders will allow you to access up to 80% of your home’s appraised value, minus your current mortgage balance.

For example, if your home is valued at $1,000,000 and you owe $600,000 on your mortgage, you could potentially qualify for a home equity loan of up to $200,000. If you’re unsure how much equity you have available, Tribecca can help you determine that quickly with a no-obligation assessment.

Like any financial product, home equity loans come with trade-offs. Because your home is used as collateral, failing to keep up with regular payments could put your property at risk. There may also be closing costs or legal fees associated with setting up the loan. And while taking on additional debt should never be done lightly, using a home equity loan strategically—for example, to replace higher-interest debt or invest in property improvements—can help you save money and build long-term value.

In most cases, interest payments on a home equity loan in Canada are not tax deductible. The exception is when the funds are used to generate income—such as buying an investment property or contributing to a business. Because the rules can be complex, it’s best to consult a tax professional to understand how this applies to your situation.