A home equity line of credit (HELOC) is a cross between a credit card and a mortgage. It is a revolving credit product that allows you to draw money on demand up to a specific limit. It also uses your house as security.
Over one and a half decades, HELOCs have accounted for a large portion of non-mortgage debt in Canada, particularly in Ontario. Apart from low interest, thanks to their collateral requirement, these products are easily accessible since anyone with home equity can apply for one.
Sadly, many HELOC holders end up seeking consolidated debt counseling in Sudbury, for these lines of credit are prone to misuse and abuse. Each case is different, but here are the three main reasons why HELOCs have been doing more harm than good to average Canadians.
Lack of Understanding
With the massive popularity of HELOCs, it is easy to assume that everyone understands them. Apparently, not.
A recent survey revealed that 19% of more than three million HELOC holders in Canada took out more money than they should. The average HELOC debt in the country $65,000, but more or less 25% of borrowers owe a staggering amount of over $150,000.
Furthermore, more or less 50% of 4,800 online survey respondents do not know HELOC basics. Many of them are not aware that lenders can raise interest rates, change credit limits, and collect unpaid balances at any time.
Another common mistake of average HELOC holders is a partial payment. Many of them like to take care of just the minimum amount required in the bill. A quarter of study participants confessed paying only the interest every month.
As a result, the outstanding balances of many Canadian HELOC holders do not shrink. They continue to owe the same amount of cash even if they pay monthly, albeit insufficiently.
The rise of interest rates compounds the problem. In the past, HELOCs were viewed as cheap sources of credit. Beginning in 2017, the cost to use a HELOC has gradually increased, making this revolving credit product even less affordable and risky.
Perhaps the biggest tragedy here is the fact that many Canadians do not use HELOCs for emergencies. Instead, they access funds through them to buy stuff on credit, as they would with plastic.
Moreover, about 50% of all HELOC holders spend money on home improvement. Nearly a quarter use the instant cash to consolidate other debts.
The purposes can be good examples of sound HELOC usage. However, many borrowers also tap home equity to buy a brand-new car and pay for everyday expenses.
If you share the same financial habits, it could be a sign that you do not have adequate savings in the bank, to begin with. Borrowing against your house to eat out or update your wardrobe is a recipe for disaster.
HELOCs are not a replacement for credit cards. You should always think twice before applying for one, for you can lose the roof above your head if you eventually go delinquent.