Have a repayment plan when borrowing using a home equity line of credit: experts

OTTAWA — A home equity line of credit may be a cheap and easy way to borrow money to pay off your lingering holiday bills or consolidate high-interest debt, but experts caution that you need a plan to repay the money.

They say it is all too easy to only make the minimum monthly payments to cover the interest and never make any progress on reducing the amount you owe.

“It is so easy to stay in debt for a long, long period of time,” says Scott Hannah, chief executive of the Credit Counselling Society.

Hannah says consolidating high-interest debt using a home equity line of credit that charges a lower rate of interest can be a good plan, but you need to understand how much you can afford to borrow, the interest rate you are going to be charged and how are you going to repay it.

Too often, he says, a HELOC is used by those who are spending more than they earn to cover daily expenses.

“It can really mask spending behaviour, it can really mask the fact that a person may not be managing their financial affairs well,” Hannah says.

A HELOC is secured by the value of your home while the interest rate charged is normally linked to the big bank prime rates and fluctuates as that rate changes.

The Bank of Canada has raised its key interest rate target five times since the middle of 2017, moves that have driven up the cost of borrowing.

A report by the Financial Consumer Agency of Canada says HELOCs are the largest contributor to non-mortgage consumer debt, more than double that of either credit cards or auto loans.

However, Michael Toope, a spokesman for the agency, says the survey found many consumers don’t understand how the lines of credit work.

“People are not very familiar with the terms and conditions of the loans, these lines of credit, and they generally don’t have great plans for paying them back,” he said.

Just 15 per cent of HELOC holders knew that a financial institution can increase an interest rate at its discretion, while 45 per cent knew there are fees to transfer a HELOC to another institution.

The FCAC survey also found that one in five HELOC holders borrowed more than they intended.

The most popular use of a HELOC, according to the survey, was for home renovations at 49 per cent, while 22 per cent said they used their HELOC for debt consolidation.

Toope says if you are going to use a HELOC you need to know what the money is going to be used for and how you are going to pay it back.

“You need to know why you are borrowing that money or why do you need that line of credit,” he said.

Hannah says if you have a plan and understand the risks, a HELOC can be helpful.

“A low rate line of credit is a good product if used properly and with a specific purpose,” he says.

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