Do you understand how HELOC works? Many Canadians don’t

Let’s take a little quiz

If you make interest-only payments on a line of credit, you’ll have it paid off:

A. In 2 years B.In 5 years C.In 22 years D.Never

Think about it for a moment. I hope you got the correct answer, which is D. Paying the interest only on a line of credit will leave you with that debt forever.

Unfortunately, according to a recent report by the Financial Consumer Agency of Canada, for many Canadians, their knowledge and use of home equity lines of credit (HELOC) is putting their well-being at risk.

Some standout findings by the report are:

• Most respondents used their HELOC as planned, but one in five borrowed more than intended
• Most scored less than 50 per cent on their knowledge of HELOCs,

The results also show that more than 25 per cent surveyed made mainly interest-only payments on their HELOC. But, 62 per cent of those interest-only payers expected to repay their HELOC in full within five years, an overly optimistic result considering more than three million Canadians holding a HELOC owe an average of $65,000.

Shannon Lee-Simmons, fee-only Certified Financial Planner and author of, Worry Free Money; the guilt-free approach to managing your money and your life, says HELOCs can be difficult to manage for some people. “I find that they can spiral during the maternity leave and daycare years when incomes take a hit and expenses skyrocket,” says Lee-Simmons. “Families tend to have to dig themselves out of that for some time once daycare is over. I often say the only financial goal young families need during those very expensive years is to try to not go into debt or as little as possible so that when the daycare expenses are gone, you can put that money towards savings.”

If you’re struggling to pay off your debt, reach out to a non-profit credit counsellor or Certified Financial Planner in your area. You can find one at FindYourPlanner.ca

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