A home equity line of credit can be an important source of emergency funding, and many Canadians have opted for its flexibility and lower interest rate. But many are not entirely sure of what they have signed up for, according to a survey out today.
The Leger Marketing poll, commissioned by TitlePLUS, found that 79% of Canadians with a HELOC said they were quite confident of their level of knowledge about the product. But when asked a series of eight true-or-false questions, they were correct on only 43% of the questions (on average).
“There’s more to this arrangement than meets the eye,” said Ray Leclair, LAWPRO’s vice-president, public affairs (acting) and a real estate lawyer. “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.”
Scarcely more than half (55%) reviewed the loan documents with a loan officer and only 33% read all the fine print, while 11% admitted they didn’t even read the documents. Just 12% consulted with a lawyer before inking the arrangement.
“For most Canadians, your home is your biggest asset. You wouldn’t buy or sell it without consulting a real estate lawyer,” said Leclair. “Borrowing against it is just as important because a HELOC is a mortgage with similar implications; and 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.”
Perhaps not surprisingly, men were the most reckless, with 15% signing without reviewing the documents, versus 7% of women. At the same time, 65% of men said they were confident in their knowledge of what they had signed, versus 52% of women.
Among the biggest mysteries to those who have a HELOC:
- 57% did not know the financial institution lending the money put a mortgage on the borrower’s home.
- 58% did not know that taking out a HELOC on top of their existing mortgage resulted in the lending institution placing a second mortgage on the home, or modifying the original mortgage to capture all the equity in the home;
- 58% did not know that their home became the bank’s security for any credit card debt, other loans they have with that bank, or any other loans they have co-signed.
- 62% 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;
- 69% did not know that having a HELOC could negatively affect their credit rating;
- 83% of 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.
“Using your home to secure a loan is a case of ‘Borrower Beware’,” said Leclair. “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.”
|What are Canadians using their HELOC for?|
|– home renovations, 37%|
|– car, 17%|
|– basic living expenses, 11 %|
|– vacation, 11%|
|– down payment on an investment property, 9%|
|– children’s education, 5%|
|– funding for their business, 5%|
|– haven’t used it, 25%|