this was the reason why many consumers managed to reduce their credit card balances and high-interest unsecured loans amid the pandemic, although now it seems that the matter has only been covered by a Band-Aid.
A recent release by Equifax Canada has revealed that during the second quarter of this year, there has been a massive 56.7 per cent increase in new home equity lines of credit (HELOCs) in the country, the highest rate reported over the past decade. This signals that many Canadians had decided to integrate their high-interest debt into low-interest HELOCs, a sensible approach from a cost-of-borrowing perspective.
However, analysts warn that this strategy does have certain drawbacks when considering all its implications.
HELOCs are a form of consumer debt which allow homeowners to borrow against the equity in their home. This means that HELOC does not eliminate the debt but merely reduces the interest rate and the payment required to service the debt. Therefore, if an individual does not review his spending habits before consolidating his debt into a HELOC or mortgage, he runs the risk of having double the debt to repay.
Accordingly, consumers are advised to firstly track their actual life cots and update their budget and determine if the end result is a deficit. If it is so, this would mean the probability of using credit to offset the shortfall becomes greater. As a result, the borrower might find himself struggling to pay a higher HELOC payment in a couple of years, while still having to settle those re-accumulated high-interest credit cards.
