Why Canadians should be careful about HELOCs

Around 3 million Canadians have home equity lines of credit (HELOC), which could expose them to risks of over-borrowing, a study said.

A study released early this year by the Financial Consumer Agency of Canada said many people appear to lack awareness of the terms and conditions of HELOCs, exposing them to the risk of over-borrowing, carrying debt for extended periods, and uninformed decision-making.

A HELOC is a secured form of revolving credit wherein the lender uses the borrower's home as a guarantee. Lenders typically offer them with a mortgage as a combined product known as re-advanceable mortgage. Borrowers often use their HELOCs for renovations, debt consolidation, and other expenses.

Also read: Canadians using home equity lines of credit

While HELOCs can benefit borrowers through low interest rates, convenient access, and flexible repayment terms, they can also encourage consumers to borrow excessively.

In the FCAC study, 27% of the borrowers polled said they make mainly interest-only payments on their HELOCs. On average, Canadians owe $65,000 against their home equity.

"Without a repayment plan, consumers may carry debt longer than anticipated and slip into patterns of behaviour that trap them on a treadmill of debt," said Lucie Tedesco, former commissioner at FCAC.

According to News Canada, borrowers need to ask themselves these questions before taking out a HELOC:

  • Would a HELOC tempt you to use your home like an ATM?
  • Could you still afford HELOC payments if you lose your job or interest rates go up?
  • Are you prepared to stick to a plan to pay it off fully, and avoid continually borrowing against your home equity?

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