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Canadians are using their homes like an ATM

A home equity line of credit can tempt borrowers to take on too much debt (Getty)
A home equity line of credit can tempt borrowers to take on too much debt (Getty)

Cash-strapped Canadians are using their homes like a bank machine to help pay their bills, according to an MNP report.

It’s no secret that household debt has reached dizzying heights. One of the main drivers is home equity lines of credit (HELOCs), especially in parts of the country where home prices have shot up over the years.

The problem is especially pronounced in places like Vancouver where home prices have come down and the addiction to HELOCs can quickly get out of control.

“For a lot of people, home equity is likely their plan for savings and sometimes for retirement,” said Grant Bazian, president of MNP, in the report.

“A HELOC might seem like a cheap and convenient mechanism for credit, but what can happen is that they borrow too much and end up struggling with the debt in the long term because they have no plan to cover unexpected expenses.”

According to a recent survey by Ipsos on behalf of MNP, 27 per cent of Canadian homeowners with a HELOC say they have used the cash to pay down other debts. Meanwhile, 36 per cent say they’ve used it to pay for things they couldn’t otherwise afford, like home renovations.

The survey also found that 14 per cent used their HELOC for things like cars and vacations, while 9 per cent invested it in more real estate.

“It seems there was a time not so long ago when paying off the mortgage was an important financial goal for households. But today the house is an ATM and the cash withdrawn is being used to pay other bills or - even worse - to fuel household spending,” he says.

Based on the survey, it doesn’t look like borrowers are too worried about the situation. Only 14 per cent say they regret the amount borrowed and the same proportion of respondents say they are concerned about paying off their HELOC.

“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,” he explains.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains

Yahoo Finance Canada
Yahoo Finance Canada

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