Personal Investor: Most Canadians don't understand HELOCs
Most respondents to a new survey from the Financial Consumer Agency of Canada scored less than 50 per cent on their knowledge of home equity lines of credit (HELOCs).
That’s alarming, considering HELOCs have become a way of life for young Canadian households looking for easy, relatively cheap money. According to the federal financial consumer watchdog, Canadian HELOCs currently carry an average balance of $65,000.
The agency also said over the past 15 years, HELOCs have become the largest contributor to growth of non-mortgage household debt in Canada – more than doubling credit cards or auto loans.
Most HELOCs are used to borrow for home renovations, debt consolidation, vehicle purchases and daily expenses, according to the survey.
A generation ago, the very idea of leveraging the roof over your head for cash suggested financial dire straits. Yet, dire straits seem to be where many homeowners with HELOCs are heading. The same survey found 19 per cent of Canadians borrowed more than originally intended, and 25 per cent only paid back the interest on the loan while the principal grew. It also found those aged 25 to 34 were most likely to struggle if their payments were to increase by $100 a month.
Interest rates on HELOCs are generally tied to the prime lending rate of the major banks since the house is used as collateral. According to the consumer agency, debt accumulation and rising borrowing rates could put many Canadian households at risk of default and could have a negative impact on the entire housing sector.