How Lines of Credit Work in Canada: Daily Interest, Variable Pricing, and Limit Cuts

A line of credit is a revolving account with a maximum you can borrow against, and you are charged interest only on the portion you have actually drawn. Repay the balance and the available room returns, so the same limit can be reused. The catch is that the rate is almost always variable — it moves with the lender's prime rate — and the limit is not a permanent right: a lender can reduce or freeze it, which is why the fine print matters more than the advertised number.

What a line of credit actually is

A line of credit sits between a credit card and an instalment loan. Like a credit card it is revolving: you draw, you repay, you draw again, and you pay interest only on what is outstanding. Like a loan, the limit is usually far larger than a card and the rate is usually far lower.

What it is not: it is not a fixed sum handed over once with a set repayment schedule. There is usually no maturity date on the drawn balance, and no obligation to pay down principal on any particular timetable — which is a feature and a trap at the same time.

• Revolving: repaid room becomes available again.
• Interest on use only: a zero balance generally costs nothing.
• Variable pricing: the rate is expressed as a spread over the lender's prime rate.
• Open-ended: no fixed end date, and often repayable on demand.
• Access varies by product: a linked chequing account, online transfers, cheques, or a card.

Interest is charged daily on the drawn balance

This is the mechanism most people miss. Interest is not calculated once a month on your closing balance. It is calculated daily, on each day's closing balance, using the annual rate divided by the number of days in the year. The arithmetic is: (annual rate ÷ 365) × daily balance × number of days the balance was outstanding.

Interest is then posted to the account, typically monthly. If you have not paid it, it is added to the balance, and the next month's daily interest is charged on the larger figure. That is compounding, and it is why a line of credit can quietly cost more than the headline rate suggests whenever payments are kept at the minimum.

Two practical consequences follow. First, timing matters: drawing money and repaying it three days later costs three days of interest, not a month's worth. Second, payment size matters more than rate: a minimum payment that covers only the interest leaves the principal untouched indefinitely.

Why paying only the interest feels fine and isn't

Interest-only minimums keep the payment small and the account in good standing, so nothing looks wrong. Meanwhile the balance never falls, your available room never grows back, and the next emergency goes onto the same balance. A line of credit used as a short bridge is cheap; a line of credit used as a permanent balance is an expensive habit.

Why line of credit pricing is variable

Most lines are priced as prime plus or minus a spread, where prime is the lender's own published rate. Prime in turn tracks the Bank of Canada's policy rate, and the Bank of Canada publishes the policy rate and the timing of any changes. When the policy rate moves, prime-linked products usually move within days on the way up, though lenders can be slower to pass on decreases.

Because prime is set by each lender and not by the central bank, two lenders can publish different prime rates and offer different spreads on the same day. The spread you are offered is the part based on your file; the prime rate is the part based on the market. Both can change, and a rate that looks competitive at approval can look ordinary two years later.

Fixed-rate alternatives

Some lenders allow part of an outstanding balance to be converted into a fixed-rate instalment portion, with a set term and payment. That is a separate contract with its own terms, and once converted the flexibility of the revolving limit no longer applies to that money. Note that Canadian fixed-rate mortgages are compounded semi-annually by law, but a line of credit is not a mortgage and does not follow that rule — its interest is normally calculated daily.

How limits are set — and how they get reduced

An initial limit reflects income, existing debts relative to income, credit history, the type and value of any collateral, and how much overall credit the lender is willing to extend. For a secured line it also reflects the equity in the property. At federally regulated lenders, home equity lines of credit are generally limited to 65% of appraised property value, with total secured lending against the same property usually capped at 80%, according to the Financial Consumer Agency of Canada. A falling property value can therefore shrink your available room even if your own finances have not changed.

Limits are reduced for reasons that are rarely spelled out at the time of approval:

1. Scheduled reviews. Many lenders reassess limits periodically, sometimes annually, using updated income, debt and credit data.
2. A drop in credit score or a new debt load. A mortgage, car loan or several new cards can push your debt-service ratios past the lender's internal ceiling.
3. Missed or late payments elsewhere. The line itself need not be in arrears — deterioration visible on your credit report is enough.
4. Lost income. Job loss or a switch to contract work can trigger a reduction at the next review.
5. Collateral value changes. For secured lines, a re-appraisal or a soft housing market can reduce the available amount.
6. Inactivity or portfolio-wide tightening. A dormant limit may be closed, and lenders can tighten entire books of business at once.

The legal basis for all of this is usually a demand feature: many lines are payable on demand, meaning the lender can reduce, suspend or call the balance in line with the agreement. That clause is normal in Canada, but it is the single most important paragraph to read before you rely on a limit as long-term funding.

Secured versus unsecured lines

What a lender reviews when you apply for a line of credit

Applying is a credit application, not a quote. Expect a hard inquiry on your credit file, recorded whether or not you are approved, which can slightly affect your score in the short term. Canada has two national credit reporting bureaus, and a free copy of your credit report is available from each — worth reading before you apply, not after. The Financial Consumer Agency of Canada explains how to request those reports and how to dispute errors on them.

1. Proof of income. Pay stubs, notices of assessment, or financial statements if you are self-employed.
2. Debt-service capacity. Total monthly debt payments measured against gross income. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% under Guideline B-20, and apply a qualifying stress-test rate above the contract rate.
3. Credit history. Payment record, age of accounts, utilization, and any recent derogatory marks.
4. Collateral, for a secured line. An appraisal and a property search; other secured debts against the property reduce the room available.
5. Purpose and amount. A renovation, a tuition bill or a business cash-flow gap can lead to different products and different pricing.

Costs that are not interest

Ask for the full cost list, not just the rate. Depending on the product that can include an annual or maintenance fee, an appraisal or registration fee on a secured line, discharge or administration fees when you close it, optional balance-protection insurance, and the cost of any linked account. None of these appear in the interest rate. The federal criminal rate of interest — 35% per year under section 347 of the Criminal Code, calculated using a defined method that aggregates interest and certain charges — is a legal ceiling, not a benchmark for a fair price, and it is set well above what any mainstream line of credit charges.

The honest downside

• Variable means variable. A payment that is comfortable today can rise without any change in your behaviour.
• Revolving access normalizes debt. A limit that is always available tends to be always used.
• Demand clauses cut both ways. The flexibility that lets you repay early also lets the lender reduce the limit or call the balance.
• Utilization affects your credit score. A fully drawn line reads as high utilization even when every payment is on time.
• A secured line risks a secured asset. The lower rate exists because the lender has something to take if things go wrong.

If something goes wrong

Complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, which also publishes plain-language guidance on credit products. Provinces license and supervise most other lenders and each has a consumer protection office, so the correct regulator depends on who you borrowed from. If a line of credit becomes unmanageable, the options that carry legal protection — a consumer proposal or a bankruptcy — can only be administered by a licensed insolvency trustee, regulated by the Office of the Superintendent of Bankruptcy Canada. A consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first; a first bankruptcy stays for six years after discharge.

Which of those paths is appropriate depends on individual circumstances. Decisions of that size are worth reviewing with a regulated professional rather than a comparison page, and the same is true of any borrowing that puts a home at risk.

loanwolf.ca is a matching and comparison service, not a lender. We do not make loans, set rates or make credit decisions. The lowest advertised rates are only available to the most qualified applicants, and the rate and limit you are offered depend on your file — so compare the total cost of borrowing over the life of the balance, not just the headline rate.