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Most Canadians not aware of HELOC terms warns FCAC

Home equity lines of credit (HELOCs) are widely sold products but it seems that many borrowers are not fully aware of their terms and conditions.

Over the past 15 years, HELOCs have emerged as the single largest contributor to the growth of non-mortgage household debt in Canada—more than double that of either credit cards or auto loans.

A study by the Financial Consumer Agency of Canada (FCAC) shows that most of the 4,800 participants in a HELOC terms knowledge test scored below 50%.

The agency is warning that borrowers are risking over-borrowing, persistent debt, and wealth erosion from their uninformed decision making.

It’s urging lenders to help educate consumers about the potential downside to HELOC borrowing.

"These results point to a pressing need for financial institutions and FCAC to help Canadians realize that not using HELOCs responsibly can have serious repercussions on their financial well-being. Without a repayment plan, consumers may carry debt longer than anticipated and slip into patterns of behaviour that trap them on a treadmill of debt," said FCAC commissioner Lucie Tedesco.

Over-optimistic borrowers
FCAC says that the average HELOC balance held by around 3 million Canadians was $65,000.

However, a quarter of respondents are only repaying interest but 62% of them still believe that they will clear their loan within 5 years.

The survey reveals that 19% of respondents had borrowed more on their HELOC than they intended; and younger borrowers (aged 25-34) were more likely to say a $100 increase in the monthly payment would be a struggle to afford.

by Steve Randall

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