Glossary
Secured Line of Credit
A line of credit backed by an asset, such as a home, that typically charges a lower interest rate than an unsecured line of credit..
A secured line of credit is a revolving credit facility backed by an asset — usually a home, and sometimes investments or cash — that typically carries a lower interest rate than an unsecured line of credit because the lender holds collateral it can claim if the debt is not repaid. The lender registers a charge against the asset, and the borrower can draw, repay, and redraw up to an approved limit.
How a secured line of credit works in Canada
When the collateral is a home, the product is commonly called a Home Equity Line of Credit (HELOC). The maximum limit is set as a percentage of the property's value, and federally regulated lenders assess the arrangement under OSFI's Guideline B-20. The rate is normally expressed as the lender's prime rate plus or minus a spread, so the cost of borrowing moves when prime moves.
Many secured lines of credit are interest-only during the draw period: the borrower may pay only interest each month, leaving the principal outstanding. That keeps payments low but means the balance can stay flat for years. Some lenders combine a line of credit with an amortizing mortgage in a readvanceable mortgage, where principal repaid on the mortgage increases the available credit limit.
Secured versus unsecured
- Rate: secured lines are typically priced below unsecured ones because the lender's risk is lower.
- Limit: secured limits can be far larger, since they are tied to asset value.
- Risk: default on a secured line can put the pledged asset at risk of power of sale or foreclosure.
- Setup: secured products usually involve a credit check, an appraisal, and legal or registration fees.
Why it matters to a borrower
The lower rate makes a secured line of credit useful for large, ongoing expenses or for consolidating higher-interest debt. The trade-off is that these are often demand facilities, which a lender can freeze, reduce, or call, and because the rate is variable, payments rise when prime rises. A HELOC payment calculator can show how different balances and rates change the monthly cost. Borrowers should confirm how their lender handles limit reductions, repayment terms, and renewal before relying on the credit line.
Frequently asked questions
Is a secured line of credit the same as a HELOC?
Not exactly. A HELOC is a secured line of credit backed specifically by home equity, which is the most common type in Canada. A secured line of credit is the broader category and can also be secured by investments, cash, or other assets. The rate, limit, and registration requirements differ depending on what collateral is pledged.
Why is a secured line of credit cheaper than an unsecured one?
Because the lender holds collateral, its risk of loss is lower, so it can offer a smaller spread over prime. Unsecured lines carry no asset claim, so they are priced higher and usually have lower limits. The trade-off is that missing payments on a secured line can put the pledged asset at risk, not just your credit score.
What happens if I can't repay a secured line of credit?
The lender can demand repayment, and if the balance is not paid it may enforce its charge against the collateral. For a home-secured line, that can lead to power of sale or foreclosure. Because many of these products are demand facilities, the lender may also reduce or cancel the limit before any default occurs.
Sources
Related terms
- Home Equity Line of Credit (HELOC) — A revolving credit line secured by your home, usually capped at 65% loan-to-value and typically priced off the lender's prime rate.
- Home Equity Loan — A lump-sum loan secured by the equity in your home, repaid on a fixed schedule with set payments.
- Readvanceable Mortgage — A mortgage paired with a line of credit whose limit increases as you repay mortgage principal, keeping total available borrowing roughly steady.
- Debt Consolidation — Debt consolidation means combining several debts, such as credit cards and loans, into one loan or payment, often to lower the total interest cost.
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.