HELOC vs. Refinance vs. Construction Mortgage for an ADU: Which One Fits

Most homeowners planning an ADU or garden suite figure out the "should I build this" question before they figure out the "how do I pay for this" question. That second question is where the real decision sits, and it usually comes down to three structures: a home equity line of credit, a cash-out refinance, or a construction draw mortgage. Each one moves money differently, charges interest differently, and fits a different starting position. Getting this choice right before signing anything matters more than most people expect, because switching structures mid-build is expensive and slow. This piece lays the three options side by side, then unpacks the trade-offs behind each one. For the full picture on ADU financing in Ontario, including the 2025 CMHC-insured refinance program, see the complete ADU financing guide.

The three options, side by side

The table below uses illustrative ranges rather than a specific rate quote, because the actual pricing on any of these three products depends on the lender, the borrower's credit profile, and the rate environment at the time of application. Use it to understand the shape of each structure, not to lock in a number.

HELOC: the fastest path when the equity is already there

A HELOC is a revolving line of credit secured against the home, sitting as a second charge behind the existing first mortgage. Most lenders will advance up to 65% of appraised value on the HELOC itself, with the combined total against the first mortgage capped around 80% LTV. For a $700,000 home with a $350,000 mortgage, that leaves roughly $210,000 of room before hitting the ceiling. The appeal is speed and flexibility: approval and setup typically run two to four weeks, the existing mortgage is untouched, and interest is charged only on whatever has actually been drawn. If $60,000 of a $150,000 line is outstanding, the payment is calculated on $60,000, not the full limit.

The trade-off is that HELOC rates are variable, tied to prime, so the carrying cost moves with the rate environment over the life of the build and afterward. There is also no forced repayment structure. A HELOC does not amortize on its own the way a mortgage does; many borrowers pay interest-only for years unless they set up a deliberate paydown plan. For a modest secondary suite or basement apartment where the build cost sits in the $80,000 to $180,000 range and the home already carries real equity, a HELOC is usually the simplest and cheapest way to get construction capital moving without disturbing an existing mortgage that may already be at a good rate.

Cash-out refinance: one fixed payment, one clean number

A cash-out refinance replaces the existing mortgage entirely with a new one sized to cover both the old balance and the construction proceeds, sized against the property's appraised value (in some cases the projected as-complete value, covered in the ADU financing guide linked above). The money lands as a single lump sum at closing, and the borrower is on the hook for full principal-and-interest payments on the entire amount from day one, whether construction has started or not. That is the central trade-off against a HELOC or a construction mortgage: no interest-only ramp tied to progress, just one larger payment from the start.

What a refinance buys in exchange is simplicity and rate certainty. A single fixed-rate payment for the life of the term is easier to budget against than a variable HELOC balance that fluctuates with prime, and a refinance avoids the staged-draw underwriting and inspection schedule that slows a construction mortgage down. The real cost to weigh is the prepayment penalty on breaking the existing mortgage, which needs to be pulled from the current mortgage statement and run against the new rate before committing, since that penalty can run into five figures on a fixed-rate mortgage broken mid-term. A refinance tends to fit best when the HELOC ceiling isn't high enough to cover the build, when there is no existing HELOC in place to draw against, or when the borrower simply wants one predictable payment rather than a variable balance to manage through construction.

Construction mortgage: built for ground-up builds with thin starting equity

A construction mortgage releases funds in stages as the build hits physical milestones, typically foundation, framing, lock-up, drywall and rough-in, and substantial completion, each verified by an inspector or the lender's appraiser before the next draw is released. Interest is charged only on the amount actually drawn, which keeps carrying cost low early in the build and rising as the project progresses, rather than being maximized on day one the way a refinance is. Once the final draw releases, the facility converts into a standard amortizing mortgage.

The cost of that structure is complexity and time. Lenders want a signed fixed-price builder's contract, an itemized cost breakdown, and confirmation of permit status before the file even gets underwritten, and the timeline to first advance typically runs six to ten weeks before the build itself starts. This is the right structure when the build is large enough, or the borrower's existing equity thin enough, that a HELOC or a single-advance refinance simply does not reach the full cost. The full mechanics of how draw sizing, milestone timing, and the construction-to-mortgage conversion actually work are covered in the construction mortgage guide.

Which one fits your situation

A modest build with plenty of equity already in the home, a basement apartment or small in-law suite in the $80,000 to $150,000 range, usually points to a HELOC. The setup is fast, the existing mortgage stays untouched, and interest-only on the drawn balance keeps carrying cost manageable through a build that is typically finished in a few months. A homeowner with no existing HELOC room, a first mortgage that is up for renewal anyway, or a preference for one fixed payment over a variable balance, is usually better served by a cash-out refinance, particularly when the build cost is large enough that the HELOC ceiling would not cover it in full. A ground-up detached garden suite where the borrower does not yet have meaningful equity to draw against, or where the total cost runs past $200,000, is where a construction mortgage earns its complexity: staged draws matched to staged progress keep the borrower from carrying interest on money that is still sitting in an account rather than in the ground.

None of these three is universally cheaper or better. Each one solves a different problem: the HELOC solves for speed and flexibility, the refinance solves for a single predictable payment, and the construction mortgage solves for financing a build that does not physically exist yet against a value that will not exist until it is done. The right starting point is running the actual numbers against your specific equity position and build cost, not picking a structure because it is the one you have heard of. The ADU Financing calculator shows how much you can actually borrow across all three paths, and the Garden Suite Build calculator goes further and models the full multi-year picture, including rental income and net wealth, once the unit is built and rented.