Home equity lines of credit: Consumer knowledge and behaviour

From: Financial Consumer Agency of Canada

Purpose

Over the past 15 years, home equity lines of credit (HELOCs) have emerged as the single largest contributor to the growth of household debt in Canada, after mortgages.Footnote 1   

HELOCs are revolving, and typically non-amortized, credit products secured by a lien on the borrower’s residential property.

The Financial Consumer Agency of Canada (FCAC) recently conducted an online survey of approximately 4,800 Canadians to assess their knowledge, awareness and opinions regarding the key terms, conditions, fees, and risks associated with HELOCs and readvanceable mortgages. This report presents key findings from the survey, which is a follow-up to FCAC’s 2017 report Home equity lines of credit: Market trends and consumer issues.

FCAC undertook the survey to:

  • Assess the level of consumer knowledge about HELOCs
  • Identify product characteristics and risks that may not be adequately understood by consumers
  • Gather behavioural data on how Canadians are using HELOCs

Survey Findings Highlights

  • Most respondents scored less than 50% on their knowledge of HELOC terms and conditions  
  • More than any other age groups, 25-34 year olds said they:
    • made interest-only payments on their HELOC
    • often used HELOCs to meet payments on their other debt
    • would struggle if their payment increased by $100 per month
  • More than 25% of respondents routinely made interest-only payments. However, 62% of these borrowers expected to repay their HELOC in full within 5 years
  • Renovations, debt consolidation, vehicle purchases and daily expenses were the main uses of HELOCs. Most respondents used their HELOCs as they planned, but 19% borrowed more than intended.

Background

Home equity lines of credit

HELOCs are revolving credit products secured by the borrower’s residential property. In recent years, financial institutions have increasingly promoted products that combine HELOCs with traditional mortgages under the umbrella of what is referred to as a “readvanceable mortgage.” Under readvanceable mortgages, HELOCs are typically combined with traditional amortized mortgages and other credit products such as credit cards.

Today, HELOCs are the largest contributor to non-mortgage consumer debt, more than double that of either credit cards or auto loans.Footnote 2

When used responsibly, HELOCs can benefit consumers through low interest rates, convenient access to funds and flexible repayment terms. However, HELOCS allow consumers to make interest-only payments, which can result in homeowners carrying debt for prolonged periods. In addition, the convenient access to funds and low interest rates can encourage consumers to add to their debt load, thereby increasing stress on Canadian households at a time when interest rates are rising and households are carrying record amounts of debt.

Consumer issues

In 2017, FCAC published a report following an industry review of HELOCs. The report, Home equity lines of credit: Market trends and consumer issues, identified four potential consumer issues: over-borrowing, debt persistence, wealth erosion and uninformed decisions-making.Footnote 3 The report identified some contributors to these issues such as the complexity of readvanceable mortgage products and HELOCs, a lack of consumer awareness and understanding of HELOCs, and the limited availability of information to help consumers understand how these products work.

Survey methodology

The survey primarily targeted homeowners aged 25 and older who routinely volunteer to participate in online surveys. Survey invitations were targeted towards respondents who owned a house, condo, or co-op. It included consumers who did not hold HELOCs, those who held a HELOC but had not yet used it (“HELOC holders”), and consumers who had borrowed on their HELOC (“HELOC borrowers” or “HELOC users”).

While the survey is not representative of the Canadian population as a whole, meaningful conclusions can still be drawn from the sample. A copy of the survey and of the methodological report are available at Library and Archives Canada.Footnote 4

Research findings

Report structure

This report is divided into two parts. The first section reflects responses from all those surveyed. The second section focuses on responses from HELOC holders and HELOC users.

Demographics–all respondents

Figure 1 shows the age breakdown of respondents.

Figure 1: Age of respondents

Figure 1, text version below
Text version – Figure 1: Age of respondents
Respondent age group Percent
25-34 18
35-44 18
45-54 20
55-64 20
65+ 24

The majority (52%) of respondents lived in households with annual incomes of $60,000 and greater, as shown in Figure 2. Just over 20% of respondents reported earning $100,000 or more per year, while less than 20% reported annual household incomes below $40,000.Footnote 5

Figure 2: Annual household income of respondents

Figure 2, text version below
Text version – Figure 2: Annual household income of respondents
Annual household income Percent
Under $20,000 6
$20,000 to just under $40,000 13
$40,000 to just under $60,000 17
$60,000 to just under $80,000 16
$80,000 to just under $100,000 15
$100,000 to just under $150,000 15
$150,000 and above 6
Prefer not to answer 12

Almost three-quarters (74%) of respondents were homeowners and owned a house, a condo, or a co-op.Footnote 6 As shown in Figure 3, over half (54%) of homeowners in the sample had a mortgage, more than one-third (35%) a HELOC, and just over one in six (17%) a readvanceable mortgage. 

Figure 3: Percent of homeowners who have a mortgage, HELOC or readvanceable mortgage

Figure 3, text version below
Text version – Figure 3: Percent of homeowners who have a mortgage, HELOC, or readvanceable mortgage
Type of financing Percent
Mortgage 54
HELOC 35
Readvanceable mortgage 17

Twenty-one percent of homeowners said they had both a HELOC and a mortgage, while 13% of homeowners reported having a HELOC but no mortgage. Fourteen percent homeowners said they had both a HELOC and a readvanceable mortgage.

There were slight differences in the types of debt held by respondents who owned a house and those who owned a condo/co-op. While both were equally likely to have a mortgage (54%), respondents who owned a house were more likely to say they had a HELOC (36% vs. 26%) and a readvanceable mortgage (18% vs. 10%).Footnote 7

Familiarity with HELOCs—all respondents

As shown in Figure 4, 63% were somewhat familiar or not at all familiar with HELOCs, 15% respondents said they were very familiar with HELOCS, and 18% were moderately familiar. 

Figure 4: "On a scale of 1 to 4, how familiar are you about Home Equity Lines of Credit?"

Figure 4, text version below
Text version – Figure 4: "On a scale of 1 to 4, how familiar are you about Home Equity Lines of Credit?"
Level of familiarity with HELOC Percent
Very familiar 15
Moderately familiar 18
Somewhat familiar 29
Not at all familiar 34
Don't know 4

Respondents with HELOCs were much more likely to say that they were very familiar or moderately familiar with HELOCS (Figure 5). Among HELOC holders, 69% were very or moderately familiar with HELOCs, compared to 25% of non-holders. 

Figure 5: "How familiar are you about Home Equity Lines of Credit (HELOCs)?"

Figure 5, text version below
Text version – Figure 5: "How familiar are you about Home Equity Lines of Credit (HELOCs)?"
Level of familiarity with HELOC Percent
HELOC holders Non-holders
Very or moderately familiar 69 25
Somewhat or not at all familiar 30 72

Knowledge levels—all respondents

Overall knowledge

Nine of the survey’s questions assessed consumers’ knowledge about certain HELOC product characteristics.

Figure 6: Number of correct answers, HELOC holders versus non-holders

Figure 6, text version below
Text version – Figure 6: Number of correct answers, HELOC holders versus non-holders
Number of questions correct Percent
HELOC holders Non-holders
0-3 67 32
4-6 29 57
7-9 4 10

As shown in Figure 7, respondents who said they were very or moderately familiar with HELOCs were more likely to correctly answer the knowledge questions, in comparison to respondents who responded they were somewhat or not at all familiar with HELOCs.

Overall, out of nine questions asked, respondents only answered an average of 3 questions correctly. In comparison to non-HELOC holders, HELOC holders generally answered a greater number of questions correctly. HELOC holders provided correct answers to an average of 4 of the questions, compared with 2 for non-HELOC holders.Footnote 8

Figure 7: Number of correct answers according to self-reported familiarity

Figure 7, text version below
Text version – Figure 7: Number of correct answers according to self-reported familiarity
Number of questions correct Percent
HELOC holders Non-holders
0-3 29 73
4-6 58 25
7-9 13 2

Responses to individual questions—all respondents

As shown in the table below, most respondents knew that a HELOC is secured against a home and is a revolving credit product. However, consumers demonstrated lower levels of knowledge about:

  • when HELOC interest rates could increase
  • what maximum loan-to-value ratio was permitted
  • whether HELOCs were amortized loans
  • whether lenders could require a HELOC to be repaid at any time
  • when financial institutions could lower HELOC credit limits
Table 1: Percentage of respondents with correct answer
  HELOC holders (%) Non-holders (%) All respondents (%)
A HELOC is secured against a home. 88 59 65
A HELOC’s credit limit can automatically increase when a mortgage or other related products are paid down. 50 30 34
Your lender can require you to repay your HELOC at any time. 39 21 25
A financial institution can lower the credit limit on your HELOC at any time. 46 28 32
There are fees to transfer a HELOC to another institution. 45 26 30
A HELOC is revolving credit, like a credit card that you can pay down and re-use. 83 43 52
A HELOC is not an installment loan, like a car loan that you pay down over time. 37 17 22
With a HELOC you can borrow up to a maximum of 65% of the value of the property. 21 11 13
A financial institution can increase a HELOC’s interest rate at its discretion. 15 11 14

Survey results—HELOC holders

Overall, about one-third (35%) of total respondents who owned a home, condo, or co-op had a HELOC.

Demographics

The age profile of HELOC holders was similar to non-HELOC holders, with 77% of HELOC holders between 25 and 65 years of age.

Nearly all (91%) respondents with a HELOC owned a house; the remainder owned either a condo or a co-op.

As shown in Figure 8, HELOC holders tended to report higher household incomes when compared to non-holders. Just under a third (29%) of HELOC holders lived in households earning $100,000 or more per year, compared with less than one in five (19%) for non-holders. Eight percent of respondents with a HELOC reported annual household incomes below $40,000, while 23% of non-holders had annual household incomes below $40,000.  

Figure 8: Annual Household income of HELOC hoders and non-holders

Figure 8, text version below
Text version – Figure 8: Annual Household income, HELOC holders versus non-holders
Annual household income Percent
HELOC holders Non-holders
Under $20,000 1 8
$20,000 to just under $40,000 7 15
$40,000 to just under $60,000 14 18
$60,000 to just under $80,000 18 15
$80,000 to just under $100,000 20 13
$100,000 to just under $150,000 20 13
$150,000 and above 9 6
Prefer not to answer 10 12

Using HELOCs

About one in five HELOC holders borrowed more than initially intended

Over two-fifths (43%) of HELOC holders sampled considered the amount borrowed to be as much as they had initially intended, while 13% borrowed less than intended, as shown in Figure 9. Nineteen percent had not used their HELOC yet. Nearly one in five HELOC holders (19%) said they borrowed more than originally intended. 

Figure 9: "Consider the amount of money you have borrowed on your HELOC, do you feel this amount is:"

Figure 9, text version below
Text version – Figure 9: "Consider the amount of money you have borrowed on your HELOC, do you feel this amount is:"
Respondents' perceptions about the amount borrowed on HELOC Percent
Less than intened 13
As much as intended 43
More than intended 19
I haven't used it 19
Don't know 6

Nearly half of HELOCs used for renovations

As shown in Figure 10, most HELOC borrowers in the sample used their HELOCs to pay for renovations (49%), followed by debt consolidation (22%).Footnote 9  The least common uses (not shown) were to buy big ticket items (4%), contribute to down payments on residential property (4%), and for education and training expenses (6%).

Figure 10: "What did you use your HELOC for?"

Figure 10, text version below
Text version – Figure 10: "What did you use your HELOC for?"
Purposes that HELOC has been used for Percent
Renovation 49
Debt consolidation 22
Purchase vehicle 19
Day to day expenses 19
Emergency fund 14
Vacation/travel 13
Residential property 11
Financial investments 11

Overall, most respondents tended to use HELOCs for similar purposes, regardless of demographic differences such as age or income. However, HELOC borrowers with annual household incomes above $150,000 were more likely to have used HELOCs for financial investment or investment in real estate. HELOC users aged 25-34 were more likely to say they used their HELOC for day-to-day expenses, education/training, and business purposes.

HELOC users borrowed the most to buy residential property

Figure 11 shows how respondents spent HELOC funds. The largest median amounts were for residential properties ($59,800), vehicle purchases ($15,000), and financial investments ($15,000).Footnote 10  Respondents borrowed the least for day-to-day expenses ($1,500), education and training expenses ($2,000), business purposes ($2,000), and emergencies ($2,000). 

Figure 11: Median and average amount borrowed by category

Figure 11, text version below
Text version – Figure 11: Median and average amount borrowed by category
Category of expenditures Amount borrowed
Median Average
Renovation $10,000 $28,100
Debt consolidation $10,000 $21,500
Day to day expenses $1,500 $10,800
Purchase a vehicle $15,000 $22,900
Emergency fund $2,000 $8,000
Vacation/travel $3,000 $4,600
Financial investments $15,000 $72,300
Residential property 59,800 $88,500
Education and training expenses $2,000 18,400
Medical expenses $2,500 $14,500
Investment in real estate $29,300 $72,200
Downpayment on residential property $10,000 $137,500
Business purposes $2,000 $33,800
Buy big ticket items $10,000 $17,000
Helping children $10,000 $37,800

HELOC borrowers who used their HELOC for renovations or debt consolidation responded more often than other HELOC users that they borrowed more on their HELOC than originally intended.

Most HELOC borrowers used their HELOC mainly or only as intended

As shown in Figure 12, a large majority (71%) used their HELOC “only as intended” or “mainly as intended.” One in five (20%) used their HELOC “somewhat as intended,” while a small number (5%) used their HELOC “not at all as intended.” 

Figure 12: "Did you use your HELOC as you intended?"

Figure 12, text version below
Text version – Figure 12: "Did you use your HELOC as you intended?"
HELOC used as intended Percent
Only as intended 38
Mainly as intended 33
Somewhat as intended 20
Not at all as intended 5
Don't know 4

As shown in Figure 13, 81% respondents aged 65 years and older used their HELOC “only as intended” or “mainly as intended.” 

Figure 13: Use of HELOC by age

Figure 13, text version below
Text version – Figure 13: Use of HELOC by age
Respondent age group Percent
"Only as intended" or
"Mainly as intended"
"Somewhat as intended" or
"Not at all as intended"
25-34 59 37
35-44 63 34
45-54 73 23
55-64 76 22
65+ 81 14

Among younger respondents, 59% of those aged 25-34 said they used their HELOC “only as intended” or “mainly as intended.” When compared with older respondents, more than double the percent of younger respondents (37% vs 14%) used their HELOC “not at all as intended” or “somewhat as intended”.

Some borrowers used their HELOCs to meet payments on other credit products

While most HELOC borrowers (65%) said they “rarely” or “never” used their HELOC to meet payments on other debt (loans, credit cards, or mortgage payments), a minority (13%) said they did this “frequently” or “most or all of the time.” Another 16% said “sometimes.”

As shown in Figure 14, shows that younger HELOC borrowers were more likely to say they used their HELOC to meet other loan, credit card, or mortgage payments when compared with older borrowers. Over one-third (36%) of HELOC borrowers aged 25-34 said they used their HELOC to make other debt payments “frequently” or “most or all of the time.” In contrast, only 15% of respondents aged 45 or older said they did this.  

Figure 14: "Please indicate how often you use your HELOC to meet other loan, credit card of mortgage payments."

Figure 14, text version below
Text version – Figure 14: "Please indicate how often you use your HELOC to meet other loan, credit card, or mortgage payments."
Respondent age group Percent
Frequently or most or all the time Sometimes Rarely or never
25-34 36 27 35
35-44 20 27 53
45-54 6 27 71
55-64 4 27 83
65+ 5 27 76

Almost half of HELOC holders had a combined credit limit of $75,000 or more

As shown in Figure 15, nearly half (49%) of the HELOC holders said the sum of their HELOC credit limits was $75,000 or greater.Footnote 11 Almost one-quarter (23%) had a total sum of $150,000 or over. A large minority of respondents (18%) responded “don’t know” when asked about the total sum of their HELOC credit limits. 

Figure 15: "What is the maximum amount you can borrow on your HELOC?"

Figure 15, text version below
Text version – Figure 15: "What is the maximum amount you can borrow on your HELOC?"
Amount Percent
Under $19,999 6
$20,000 to $29,999 6
$30,000 to $39,999 5
$40,000 to $49,999 6
$50,000 to $74,999 10
$75,000 to $99,999 13
$100,000 to $149,999 13
Over $150,000 23
Don't know 18

HELOC holders who reported higher annual household income were more likely to have a higher credit limit.

Repayment

Over a quarter of HELOC borrowers in our sample pay interest-only most months or every month

Traditional amortized mortgages operate as forced savings vehicles. Making regular principal and interest payments on amortized mortgages allows homeowners to build up equity in their home. Unlike traditional mortgages, HELOCs allow consumers to make interest-only payments.

As shown in Figure 16, although 42% HELOC users said they pay part of the principal every month, over one-quarter (27%) reported paying interest-only most months or every month.Footnote 12

Figure 16: "How often do you make payments on your HELOC to pay down the outstanding principal?"

Figure 16, text version below
Text version – Figure 16: "How often do you make payments on your HELOC to pay down the outstanding principal?"
Payments on outstanding principal Percent
I don't owe money on it 14
I put payments towards the principal every month 42
Most months, I pay money towards the principal, but... 14
Most months, I pay interest only, but occasionally I pay some... 18
Never. I pay interest only 9

Younger respondents were more likely to say they made interest-only payments. Over four in 10 (41%) HELOC borrowers aged 25-34 said they paid interest-only most months or every month, compared to 24% of borrowers aged 65 and over.

Most HELOC users planned to pay off their HELOC within the next five years

As shown in Figure 17, the majority of HELOC users (61%) planned to pay off their HELOC within the next five years, with just under one-third (33%) of borrowers planning to pay it off within the next year and 28% within 1-5 years. Fourteen percent planned to pay off their HELOC in 5-10 years, 10% planned to take more than 10 years, and a small percentage (2%) said they never planned to pay off their HELOC.  

Figure 17: "When do you plan to pay off your HELOC?"

Figure 17, text version below
Text version – Figure 17:  "When do you plan to pay off your HELOC?"
Pay off date for HELOC Percent
Less than a year 33
1 to 5 years 28
5 to 10 years 14
More than 10 years 10
Never 2
Don't know 13

Of respondents who pay part of their principal and interest most months or every month, 61% said they planned to pay off their HELOC within the next five years. A similar proportion (62%) of respondents reported paying interest-only most months or every month and planned to pay off their HELOC within the next five years.Footnote 13 HELOC borrowers aged 25-34 were more likely than older borrowers to say they planned to pay off their HELOC in the next five years.

Many borrowers would struggle if their HELOC payments increased by $100 per month

One-quarter (25%) of HELOC borrowers would struggle to make payments on their HELOC if the payment amount increased by $99 per month or less, as shown in Figure 18. In comparison, 32% of HELOC borrowers said their payments would need to increase by more than $200 per month before they would struggle.Footnote 14 A portion (22%) of respondents did not know at which point they would be begin to struggle to make payments.Footnote 15  

Figure 18: "Please indicate the point at which you may struggle to make your HELOC payments if the payment amount increased above what you are paying today."

Figure 18, text version below
Text version – Figure 18: "Please indicate the point at which you may struggle to make your HELOC payments if the payment amount increased above what you are paying today."
Threshold amount Percent
An increase of $50 per month or less 10
An increase of $50 to $99 per month 15
An increase of $100 to $199 per month 16
An increase of more than $200 per month 32

Younger HELOC holders were more likely than older ones to say they might struggle if their HELOC payments increased by $100 per month. Almost half (46%) of HELOC borrowers aged 25-34 said they would struggle if their payment increased by $99 a month compared with 10% of borrowers aged 65 or older.

Similarly, respondents with lower incomes were more likely than those with higher incomes to respond that they might struggle if their HELOC payments increased by $100 a month. Thirty-seven percent of HELOC users with annual household incomes below $40,000 said they would struggle if their monthly payments increased by $100 compared with 15% of those whose annual household incomes were $100,000 or more.

Conclusion

This research assessed the level of consumer knowledge about HELOCs and how consumers use HELOCs. Although HELOCs are widely sold, many consumers appear to lack awareness of the terms and conditions, according to FCAC’s survey results. A lack of knowledge about HELOCs may make it difficult for consumers who acquire or use HELOCs to ensure they are making the most appropriate financial decision for themselves.

While most HELOC borrowers said they used their HELOCs as they had originally intended, FCAC’s survey results show some respondents borrowed more than intended, made interest-only payments, or were overly optimistic about when they planned to repay their HELOC.

HELOCS can be risky products for some consumers. To mitigate these risks, financial institutions should take into account the financial needs and circumstances of consumers, disclose all relevant risks, and work with customers to ensure they understand product characteristics and have credible repayment plans.

Borrowers would benefit from more upfront information about HELOCs and should take steps to learn about them. Repayment plans that include making regular principal payments can help HELOC borrowers mitigate the risks of over-borrowing, debt persistence, and wealth erosion.

Next steps

FCAC’s research offers insight into the knowledge and behaviours of consumer who hold HELOCs. Based on this research and some of the work FCAC has already undertaken, FCAC will:

Work with financial institutions to improve the disclosure of HELOC terms and conditions

Survey results suggest that some HELOC holders lack an adequate understanding of the terms and conditions of their HELOC. The Agency will communicate its expectation to financial institutions that they do more to ensure customers thoroughly understand HELOCs and that the products are appropriate based on their consumers’ financial needs and circumstances.

Develop material to help consumers navigate the complexities of their HELOC

FCAC will continue to develop educational material to address the gaps in consumer understanding identified in this research, such as the timing of potential HELOC interest rate hikes and the right of lenders to require repayment at any time. Providing consumers with information about HELOCs can empower them to make more informed financial choices.

Continue working with financial literacy partners

FCAC will continue to work with financial literacy partners to contribute to financial education about HELOCs, budgeting, and managing debt. Many resources exist to assist consumers in these areas, such as practical tools to develop a budget and tackle paying down debt.

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