Many Canadians are using HELOCs just to pay their bills

Surging home values have led to many Canadians tapping the equity in their homes but how that equity is being used has raised concern.

Insolvency firm MNP says a worrying share of homeowners are using Home Equity Lines of Credit (HELOCs) just to pay bills with 3 in 10 using the funds to pay down other debt.

Seven in 10 say they regret the amount they have borrowed against their homes and are concerned about being able to pay off their HELOC.

“For a lot of people, home equity is likely their plan for savings and sometimes for retirement. A HELOC might seem like a cheap and convenient mechanism for credit, but what can happen is that they borrow too much. They end up struggling with the debt in the long term because they have no plan to cover unexpected expenses,” said Grant Bazian, president of MNP.

MNP’s survey, conducted by Ipsos, found that 36% of respondents have used their HELOC to pay for something they would not otherwise have been able to afford, such as home renovations, 14% have used it for a discretionary purchase such as a car, and 9% have used it to fund other real estate investments.

Uncertainty of HELOCs

“There is a lot of uncertainty that comes with HELOCs so this type of debt is particularly troublesome for those who don’t have firm financial footing. It can put people on the fast track to an endless cycle of debt, especially if the borrower accumulates more debt on the credit cards after paying them off with a HELOC,” added Bazian.

He added that those who are already cash-strapped and unable to meet other debt repayment obligations may think a HELOC will help them make ends meet but taking on more debt may put them at greater risk of foreclosure or insolvency.

“What they really need is professional financial guidance to help deal with their underlying debt,” he said.

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