16 January 2019

“Of course, it’s quite a cheap credit source, but you need to use it reasonably”, – said Michael Toope from FCAC.

People tend to borrow more than they have planned so they are left with large debts.

The poll shows a sharp lack of understanding among Canadians of how HELOCs actually work.

Only half of them know the following basic facts about HELOCs:

• Banks can increase the interest rate of a HELOC at any moment.
• The bank can demand the balance from you at any moment.
• If you want to transfer the HELOC to another bank, you’ll have to pay a fee.
• The bank can increase or cut the credit limit on a HELOC.

Rates started rising in 2017 and continued last year. More hikes may happen in 2019. Such increases affect the cost of these lines of credit, so now your HELOC could be even more expensive than a mortgage because of higher rates.

About two-thirds of respondents used their HELOC only or almost as planned.

However, HELOCs are risky for some borrowers as they don’t let you build wealth, Toope says.

The equity you build in your home when paying off the mortgage helps you build wealth, but it’s not the case when you have a debt secured by the house.

“As a result, you’re losing the long-term cost of the mortgage you have in your property,” – Toope noted.

In 2017, FCAC said that home equity lines of credit could lead some Canadians to excessive borrowing.

According to FCAC, most consumers do not repay their HELOC fully until they sell their real estate.

Almost 19% of respondents borrowed more than they planned, and 18% don’t know exactly how much they owe.

Young Canadians (25-34 years old) accounted for most respondents who make only interest payments. It’s not surprising, as this category tend to show lower incomes, mortgages and student loans. However, Toope says it’s still a sign of lacking knowledge.

The poll says 62% of those who pay off interest only, plan to pay their HELOCs off fully in 5 years, which is mathematical impossibility, according to Toope.

Half of Canadians used HELOCs for renovations, but another 22% chose it for debt consolidation. Vehicle purchases and daily expenses were also among the most popular reasons.

“People need to know how they will use HELOCs money and how they will pay their debts in order to avoid eternal revolving debt,” – Toope said.