Home equity lines of credit are making Canadians more vulnerable to financial catastrophe such as a job loss, a housing market correction or interest rate rise, Canada’s consumer protection agency warned Wednesday.

Canadians owed $211 billion on 3 million home equity lines of credit (HELOCs) last year, but 40 per cent don’t make regular payments on those loans and 25 per cent make only minimum payments or pay the interest on the credit lines, says a report by the Financial Consumer Agency of Canada.

It notes that the reliance on HELOCs has grown as Canadians have moved to alarming household debt levels. Their use skyrocketed 500 per cent from $35 billion to $186 billion between 2000 and 2010. During the same period household debt levels rose from $1.07 on every disposable dollar to $1.60.

The average debt on a HELOC last year was $70,000.

The use of the credit lines increased substantially thanks to what the agency calls “readvanceable mortgages” from the big banks. Those products attach a home equity line of credit and sometimes other features such as credit cards, to a term mortgage.

But many consumers don’t understand the complexities of those bank products, said Brigitte Goulard, deputy commissioner of the consumer agency.

“The more you pay down your mortgage, the more space you get on your HELOC. You may have the impression you’re paying down your mortgage, but if you continue going back to the HELOC to get some money you’re actually starting to use your house as an ATM,” she said.

Many consumers use HELOCs to consolidate other debts at a lower interest rate in order to increase their cash flow. But it’s important to amortize the consolidated payment to ensure the line of credit is repaid, says the agency.

Consumers in hot housing markets like Toronto’s could be at even greater financial risk if they aren’t paying down their credit lines.

“If there is a housing correction in Toronto or anywhere else in Canada and HELOCs have not been used properly, consumers could find themselves underwater,” said Goulard, although she stressed that the agency does not predict such an event or make economic forecasts.

The report notes, however, that credit lines played a role in many Americans losing their homes in the financial crisis of 2007 and 2008.

Despite the dire warnings, HELOCs and related mortgage products aren’t inherently bad, she said.

“They actually are very innovative products that can have some benefits if you need to renovate or if you want to go back to school and increase your chances of having a higher revenue down the line. Those are appropriate uses. What is not appropriate is going to the grocery store and paying your daily requirements (with the line of credit). You need to budget for those,” said Goulard.

The consumer agency has prepared an education campaign to better inform borrowers about what they may be buying with readvanceable mortgages.

It is also telling banks and lenders to provide appropriate disclosures on mortgages attached to HELOCs so that there is a combined disclosure rather than the current potentially confusing separate disclosures on the mortgage and the line of credit.

Loading... Loading... Loading... Loading... Loading... Loading...

“The majority of Canadians don’t pay back their HELOC until they sell their home,” said Goulard. “It would be preferable if they had a good (repayment) plan.”