Canadians putting homes at risk with lines of credit

Roma Luciw
Globe and Mail

Debt-ridden Canadians may be enamoured with home equity lines of credit but many are using them as a quick, easy way to borrow without really understanding how they work.

A Leger Marketing poll released Tuesday shows that 36 per cent of Canadians have a home equity line of credit (HELOC). Although more than three-quarters – 79 per cent – said they were “quite confident of their level of knowledge,” on average, they correctly responded to only 43 per cent of questions that tested their basic knowledge of how HELOCs work.

Those without a HELOC did even worse. On average, they correctly answered only three of eight true-or-false questions. The poll of 1,501 adult Canadians, commissioned by the TitlePLUS, the title insurance arm of Lawyers Professional Indemnity Co. (LawPRO), was conducted online late last month.

While home equity lines of credit can provide people with low interest rates and flexible lending terms, “there’s more to this arrangement than meets the eye,” said real estate lawyer Ray Leclair, the acting vice-president of public affairs for LAWPRO.

“Without understanding all of the implications of this type of borrowing, consumers could risk their future credit or run into issues when they sell or refinance their home.”

With interest rates flirting with rock-bottom levels, Canadians are taking on debt in record levels. Home equity credit lines, which allow people to borrow at low rates because they use their house as security, have become a popular and fairly easy way for Canadians to access cash. The fear, as with all debt, is what will happen when interest rates rise.

Chartered accountant David Trahair, who recently wrote a book on debt, says HELOCs are a dangerous trap because they spur people to spend more than they would otherwise have, which leaves them with more combined debt than someone without a HELOC.

So how are Canadians using their HELOC? Among those polled, 37 per cent have used them to finance major purchases like a home renovation, 17 per cent for a car, 11 per cent for a vacation, 9 per cent for a down payment on an investment property, and 5 per cent for children’s education. One quarter of those with a HELOC haven’t used it, the poll found.

Among those polled who have a secured line of credit, 55 per cent reviewed all the loan documents with a loan officer while 33 per cent read all the fine print. A minority, only 12 per cent, consulted with a lawyer before signing the agreement.

Most disturbingly, the poll found that 11 per cent said they did not review any documents or seek any advice before signing.

In some cases, depending on the fine print, a home equity line of credit can affect your credit rating, your ability to borrow for other needs, and even your ability to use your credit card going forward, said Mr. Leclair. He suggest people get professional advice and make sure they know what they are getting into before they sign on the dotted line.

“When you use your home as collateral, the bank has legal rights to your property and you cannot close on a sale of that home without paying back that loan,” Mr. Leclair said.

Failing the HELOC knowledge test

The poll found that the majority of Canadians were fuzzy on the details of how secured lines of credit work. Among those who said they did have a home equity line of credit:

  • 57 per cent did not know that when you take out a HELOC the financial institution lending the money puts a mortgage on the borrower’s home.
  • 58 per cent did not know that taking out a HELOC when they already have a mortgage on their home means that the lending institution places a second mortgage on the home, or modifies the original mortgage to capture all the equity in the home.
  • 69 per cent did not know that having a HELOC could negatively affect their credit rating or future loan applications.
  • 83 per cent of all survey respondents did not know that when you pay off and close your home equity line of credit, any credit card consolidated under this line of credit may be cancelled and not available for future use.
  • 62 per cent did not know that having a home equity line of credit could negatively impact your ability to take out a loan or mortgage with another financial institution.
  • 58 per cent did not know that when you take out a line of credit, your home becomes the bank’s security for any credit card debt, other loans you have with that bank, or any other loans you have co-signed.

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