Think twice before borrowing against your home equity

An estimated three million Canadians have one, and they have emerged as the single largest contributor to the growth of household debt in Canada.

Yet many consumers do not appear to fully understand how they work. No, we’re not talking about credit cards or car loans. We’re talking about home equity lines of credit or HELOCs.

According to a 2019 survey by the Financial Consumer Agency of Canada, many people appear to lack awareness of the terms and conditions of this widely sold financial product, exposing them to the risk of overborrowing, carrying debt for extended periods and uninformed decision-making.

HELOCs are a secured form of revolving credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow. And, as you pay your HELOC down, you can borrow it again, up to a maximum credit limit. Most major financial institutions offer them with a mortgage as a combined product, which is sometimes called a readvanceable mortgage. Many use them for renovations, debt consolidation, vehicle purchases and day-to-day expenses.

When used responsibly, HELOCs can benefit consumers through low interest rates, convenient access to funds and flexible repayment terms. Unfortunately, the convenient features of HELOCs can encourage consumers to add too much to their debt load. In fact, 27 per cent of those who responded to FCAC’s survey said they make mainly interest-only payments on their HELOCs. Considering that, on average, Canadians owe about $65,000 on their HELOCs, this means many homeowners end up carrying debt for long periods.

So, if you have a home equity line of credit or are considering getting one, you need to ask yourself:

• Would a HELOC tempt you to use your home like an ATM?

• Could you still afford HELOC payments if you lose your job or interest rates go up?

• Are you prepared to stick to a plan to pay it off fully, and avoid continually borrowing against your home equity? Those are just some of the questions to consider before borrowing money that will be secured by your home equity.