FCAC report: Home equity lines of credit may put consumers at risk
June 7, 2017
Home equity lines of credit (HELOC) may put some Canadians at risk of over-borrowing, according to a report released today by the Financial Consumer Agency of Canada (FCAC).
The report, titled Home Equity Lines of Credit: Market Trends and Consumer Issues, centers on the use of HELOCs by consumers, on how banks offer them and the benefits and risks of borrowing against home equity.
The report also reveals that lenders are increasingly offering readvanceable mortgages, which combine term mortgages with HELOCs and other credit products, to customers.
Readvanceable mortgages are complex. The report found that many consumers would benefit from more and clearer information about how readvanceable mortgages work, the applicable fees, terms and conditions, and the risks potentially involved. Providing consumers with more resources would put them in a position to make informed decisions about whether to finance their home purchases with readvanceable mortgages.
When used responsibly, the HELOC portion of readvanceable mortgages can provide many benefits to consumers such as low interest rates, convenient access to funds and flexible repayment terms. However, it also allows consumers to make interest-only payments which can result in homeowners carrying debt for longer periods. In addition, it can encourage consumers to add to their debt load, which could put stress on Canadian households, at a time when they are carrying record amounts of debt.
FCAC is taking action to provide consumers with the resources they need to make informed decisions. New disclosure expectations will be communicated to ensure that consumers are in a position to make informed choices. The Agency recently published new information online to help consumers navigate the complexities of financing a home purchase with a readvanceable mortgage or using HELOC funds to unlock home equity.
“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households. HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford. Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock. FCAC will ensure consumers have the right information to fully understand the risks before choosing a HELOC product under a readvanceable mortgage.”
Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada
Banks reported to FCAC that a readvanceable mortgage is now the default option offered to credit worthy mortgage customers with down payments of at least 20 percent.
Of the approximate 3 million HELOC accounts, 80 percent were held under readvanceable mortgages in 2016.
The number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011.
40 percent of consumers do not make regular payments toward their HELOC principal.
25 percent of consumers pay only the interest or make the minimum payment.
Most consumers do not repay their HELOC in full until they sell their home.
Financial Consumer Agency of Canada
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