3 million Canadians have home equity lines of credit, but half of us don’t know how they work.
A survey suggests 35 per cent of Canadians have a home equity line of credit and 19 per cent said they’d borrowed more than they intended. (Canadian Press)
Over the past 15 years, home equity lines of credit have emerged as the driver of mounting non-mortgage debt in Canada — yet many Canadians don’t understand what they’ve signed up for and are not moving to pay them off, a new survey suggests.
The more than three million Canadians holding a HELOC owed an average amount of $65,000, the study released Tuesday by the Financial Consumer Agency of Canada (FCAC) found. About one quarter of HELOC holders had a balance of more than $150,000.
Yet 25 per cent of respondents said they only made the interest payments month to month.
Ipsos conducted the online survey of 4,800 Canadians, most of them homeowners, from June 5-28, 2018, on behalf FCAC, a federal agency that promotes financial education.
HELOCs are revolving credit products secured against the equity in a home. Banks can lend up to 65 per cent of the value of a home. Such lines of credit have been easy to get and banks offer them as a default credit option to anyone with home equity.
Of the homeowners surveyed, 54 per cent had a mortgage and 35 per cent had a HELOC.
Cheap source of credit
“You can’t deny the fact that for the consumer it is a cheap source of credit. However, you have to use it well,” said Michael Toope, communications strategist for FCAC.
The problem is that people borrow more than they intended and end up struggling with the debt, he said.
The survey suggested there is a lack of understanding among consumers of how these lines of credit work.
Only half of respondents knew basic facts about the terms of HELOCs, such as:
Banks can raise the rate of a HELOC at any time.
The bank can demand the balance of a HELOC at any time.
There are fees to transfer a HELOC to another institution.
The bank can raise or lower the credit limit on a HELOC.
Interest rates began climbing in 2017 and 2018 and are likely to rise further this year. That affects the interest cost of these loans and the overall cost of paying them off. Your HELOC is more expensive than a mortgage as the interest rate is higher.
“Each bank sets its own prime rate based on the Bank of Canada rate and HELOCs are usually set at prime plus a premium, but the bank can change that premium at their discretion,” Toope said.
For some, HELOCs are risky
Almost two-thirds of respondents said they used their HELOC only or mostly as intended, as a revolving line of credit.
Yet for some, HELOCs are a risky product that eats away at their ability to build wealth, Toope said.
The equity they build in their home as they pay off a mortgage is a way for Canadians to build wealth over time, but that won’t happen if they have a debt secured by the house.
“In the end, you’re losing the long-term value of the mortgage you have in your home,” Toope said.
In a 2017 report, FCAC found home equity lines of credit may be putting some Canadians at risk of over-borrowing.
That report found most consumers do not repay their HELOC in full until they sell their home.
About 19 per cent of respondents to the new survey said they’d borrowed more than they intended.
How much do I owe?
And 18 per cent said they did not know the full balance on their HELOC.
Among those who paid only the interest on the debt, the majority were young Canadians, aged 25 to 34. That’s not unusual, as people at that stage of life tend to have lower incomes and may be burdened with student debt as well as a mortgage, but it still indicates a lack of understanding, Toope said.
The survey found 62 per cent of those who paid only the interest expected to repay their HELOC in full within five years, a plan Toope called a “mathematical impossibility.”
Half of Canadians borrowed against their HELOCs for renovations, but another 22 per cent dipped into it for debt consolidation, with vehicle purchases and daily expenses also common uses, according to the survey.
“People should know what they are going to use it for and how to pay it down, so it doesn’t become an eternal revolving debt,” Toope said.
A recent report from Equifax Canada in October 2018 concluded that consumer debt is still on the rise in Canada.
“Consumers will have tighter cash flows as interest rates climb further, which can lead to people not paying off their credit cards in full each month.
After a period of sustained economic growth, we’re moving back to a slow and steady pace. And finally, new mortgage volume has been negative over the last three quarters.
Add these together and we should begin to see upward movement in delinquencies.”
It’s unfortunate that the government has been focusing on controlling mortgage borrowing and home ownership in Canada while neglecting the impact of high interest credit card debt and the affect it is having on the financial health of Canadians.
Statistically, the amount owing is less on credit card debt than mortgage debt but the overall cost of borrowing is so much higher.
Making these large monthly payments restricts your cash flow while reducing opportunities for retirement planning and saving for the future.
Let’s take a quick look. If you aren’t paying off your credit card balance monthly, how much do you think you really paid for the big screen TV that you bought on sale after Christmas?
If you carry on only making the minimum monthly payment on the credit card after purchase, here’s what it could cost you.
If you paid $2,000 for that TV with an interest rate of 19.5 per cent on your credit card and you are just make the minimum monthly payments, it will take you more than 14 years to pay for your TV.
Yes! Fourteen years!
And it will cost you over $4,000!. (It could actually take longer and cost you more depending on the minimum payment requested by your credit card company and the interest rate being charged).
Buying this TV on credit is not a bargain.
There are dangers to borrowing to the max on your credit cards as it can leave you with very little wiggle room.
What happens if interest rates start to rise? All indications are that interest rates are on the rise moving forward into 2019.
The answer is that your minimum payment will just get bigger and bigger. And what happens if you lose your job?
How can you possibly keep making those minimum monthly payments?
If you are a homeowner, there are great possibilities for real savings by using the equity in your home as a debt consolidation tool.
The most attractive reason for consolidating debt into a mortgage is that there will definitely be savings simply by lowering the interest rate you are paying on your debt.
Another reason would be to lower your monthly payments.
This could free up cash flow to start investing and saving for retirement.
There could be some costs involved if you must break your current mortgage and there are many variables at play here:
interest rates
amortization
fees
penalties for your specific situation.
You may find the overall cost of borrowing to be higher or lower than your current situation. Always run through the math with a mortgage broker.
The benefits really depend on how the math works out and whether you are committed to changing your lifestyle to prevent charging up the balances on those credit cards again.
You will need to master a budget.
If you would like a no obligation review of your current situation, please give me a call.
Debt consolidation mortgage – If you are carrying high interest credit card debt, car loans or other personal loans you know that it can be challenging to pay off everything that you owe. A debt consolidation mortgage might be the solution for you.
If you are a homeowner and there is sufficient equity in your property, consolidating all of your debt and including it in your mortgage payment might be the right solution for you.
There are many benefits to debt consolidation including the following:
– A much lower monthly interest rate for all of your debts
– Lower monthly payments
– The comfort and convenience of making only one monthly payment instead of making multiple payments on your credit cards and other loans
– Improving your credit score by reducing the amount you owe and now being able to make all of your payments on time
A debt consolidation mortgage is not a quick fix and a full financial review should be completed with your Mortgage Broker. There could be costs to break your current mortgage to include those higher interest debts with your mortgage payment. You may be lowering your current monthly payments but now the debt is going to be repaid over a longer period of time. Is that really going to be financially beneficial? It all comes down to the math as the overall cost of borrowing could be higher or lower than what you are currently paying. Crunching all the numbers is the only way to know for sure.
There is also another real danger to consider – are you disciplined enough to stick to a budget going forward and live within your current income or will you be tempted to use those credit cards again and end up in exactly the same situation in the near future? It can become a vicious circle unless you learn to live within your budget. You don’t want to end up in the same place a year from now.
On the other hand, if you are disciplined and can live within a budget the benefits of the increased monthly cash flow could significantly improve your financial situation. These extra funds might be used for investing in your retirement with RRSP contributions and having an emergency financial fund in place for life’s surprises.
There are several possible options to consider for a debt consolidation mortgage including breaking your current mortgage to include the debt owed, a second mortgage for the consolidation or a home equity line of credit.
Now all that’s left is to figure out precisely which solution is best for you to wipe out all those high interest payments. If you would like a review please give us a call at 888-561-2679 to discuss your possible options.
