The importance of knowing your financial rights and responsibilities

November 27, 2017

By Lucie Tedesco, Commissioner, Financial Consumer Agency of Canada  

This is the final week of Financial Literacy Month! Thank you for joining the conversation. This week, we’re talking about how mortgages have changed in recent years and what you need to know to protect your long-term financial interests. 

Financial institutions have an obligation to give you clear information on certain financial products and to ensure that you have clearly consented to receive those products. 

As consumers, you have a responsibility to read that information thoroughly, particularly any agreements you are being offered, so you understand the rates, the terms and the penalties associated with financial products. 

Take, for example, the money you borrow to finance a house. If you’re like millions of Canadians, you could spend 25 years or so paying off your mortgage. Many people see home ownership as a way to accumulate personal wealth, especially if house prices rise. But the mortgages offered by financial institutions have changed and become more complex in recent years. So it’s important to understand just how they are different if you want to fully benefit from your home’s potential to build your personal wealth over the long-term, rather than your debt.

Today, to finance your house most financial institutions will offer you a readvanceable mortgage if you have a down payment of 20 per cent or more. It combines a traditional mortgage with a home equity line of credit (HELOC). There’s a big difference between these two forms of debt, and we have created a video to help explain it.

First, your mortgage debt only goes one way — down — because you must make regular payments against both the interest and the principal borrowed. This increases the equity you have in your home, meaning the difference between what you still owe and the value of your home.

But as you pay down your mortgage, a HELOC lets you borrow against your growing equity. It also allows you to make interest-only payments, without paying down the principal of your HELOC until you sell the house.

This short-term credit advantage can result in a long-term debt problem. Don’t hesitate to ask your bank for a full explanation of how these new mortgages work, and consider the implications for your financial well-being, before you sign on the dotted line.

For some people, a HELOC can be a good way to pay off other, higher-interest debt or home renovations.

But would a HELOC tempt you to use your home like an ATM? 

At a time when consumers are carrying record amounts of debt, HELOC debt may add stress to the financial well-being of Canadian households.

Mounting HELOC debt could put you at increased risk if you lose your job, get sick or injured, interest rates go up or your home decreases in value. If it consumes too much of your equity, you might end up owing more than your home is worth, lose your home or have to sell it to pay down your debt.

To use this borrowing tool wisely, stick to a plan to pay it off fully, have a budget, and avoid continually borrowing against your home equity.

There’s a lot to understand when it comes to knowing your financial rights and responsibilities. Make sure to inform yourself about today’s financial products and services, ask questions, and read the fine print before signing any loans and agreements. For more information, visit FCAC’s banking rights and responsibilities web pages and join the conversation on Twitter and Facebook.

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