Tips to help consumers better understand and repay their home equity line of credit
May 24, 2019
By Teresa Frick, Acting Managing Director of Supervision and Promotion, Financial Consumer Agency of Canada
In today’s complex housing market, homeowners and homebuyers have a lot to think about. Where to buy? When to get in the market? And how to finance their purchase?
They must also understand a vast array of financial products – many of which are becoming more and more complex.
This is certainly the case with readvanceable mortgages, which combines a term mortgage with a home equity line of credit (HELOC). According to our latest research, many Canadians appear to lack awareness of the terms and conditions of HELOCs, exposing them to risks such as over-borrowing, debt persistence, uninformed decision-making and wealth erosion.
When we surveyed Canadians, most scored below 50% on a test related to their knowledge of HELOC terms and conditions. These numbers are a concern because consumers who lack knowledge about HELOCs may be unable to ensure they are making the most appropriate financial decisions for themselves.
Something else to consider: today, there are more than three million HELOCs in Canada, and the average balance owing is about $65,000. But more than 25% of respondents to our survey said they made mainly interest-only payments on their HELOCs, and 62% of these respondents expected to repay their HELOC in full within five years. It is hard to believe that borrowers paying mainly interest-only can repay their HELOCs that quickly.
To use HELOCs wisely, here are some tips to share with your clients to improve their knowledge and help lower their risk of finding themselves in over their heads:
Make sure a HELOC is appropriate. A HELOC should meet the financial needs and circumstances of the borrower.
Ensure borrowers know what they’re getting. Borrowers should have more upfront information about HELOCs, including their risks and benefits. For instance, some may want to switch lenders when their mortgage is up for renewal, but they may first need to repay all credit products under their readvanceable mortgage. Additional legal fees may also apply if they move to a traditional mortgage. This kind of knowledge empowers borrowers to make more informed financial choices.
Establish a plan for how you will use a HELOC. Borrowers should have a realistic plan when borrowing from their HELOC. This should include a realistic budget for any home renovation projects that will be financed with a HELOC, for example.
Establish a repayment plan. Borrowers should establish a realistic repayment plan. This should include payments of interest and principal. Additionally, with a HELOC, there is usually no penalty to pay back as much as you can at any time. Remember that when you have some additional funds to spare.
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