Home equity lines of credit may put consumers at risk

Home equity lines of credit (HELOC) may put Canadians at risk of over-borrowing, says a new report by the Financial Consumer Agency of Canada (FCAC) released June 7.

"At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households,” says Lucie Tedesco, commissioner, FCAC. “HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford. Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock. FCAC will ensure consumers have the right information to fully understand the risks before choosing a HELOC product under a readvanceable mortgage."

FCAC says the number of households that have a HELOC and a mortgage secured against their home has increased by nearly 40 percent since 2011 and that 40 percent of consumers do not make regular payments toward their HELOC principal. Most consumers do not repay their HELOC in full until they sell their home.

Readvanceable mortgages

The report also found consumers are often offered readvanceable mortgages, which combine term mortgages with HELOCs and other credit products. These are complex, and the FCAC says consumers would benefit from more and clearer and information on how the mortgages work, so they could take more informed positions on whether they should purchase readvanceable mortgages.

Though the HELOC portion of readvanceable mortgages can provide many benefits to consumers such as low interest rates, convenient access to funds and flexible repayment terms, it also allows consumers to make interest-only payments which can lead to homeowners carrying debt for longer periods. In addition, it can encourage consumers to add to their debt load, which could put stress on Canadian households, at a time when they are carrying record amounts of debt, says FCAC.

New disclosure expectations

FCAC says it is taking action to provide consumers with resources to make informed decisions and adds that new disclosure expectations will be communicated “to ensure that consumers are in a position to make informed choices.” The Agency recently published new information online to help consumers navigate the complexities of financing a home purchase with a readvanceable mortgage or using HELOC funds to unlock home equity.