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Think twice before borrowing against your home equity

(NC) An estimated three million Canadians have one, and they have emerged as the single largest contributor to the growth of household debt in Canada.


Yet many consumers do not appear to fully understand how they work.


No, we’re not talking about credit cards or car loans. We’re talking about home equity lines of credit or HELOCs.


According to a 2019 survey by the Financial Consumer Agency of Canada, many people appear to lack awareness of the terms and conditions of this widely sold financial product, exposing them to the risk of over-borrowing, carrying debt for extended periods and uninformed decision-making.


HELOCs are a secured form of revolving credit. The lender uses your home as a guarantee that you'll pay back the money you borrow. And, as you pay your HELOC down, you can borrow it again, up to a maximum credit limit.


Most major financial institutions offer them with a mortgage as a combined product, which is sometimes called a readvanceable mortgage. Many use them for renovations, debt consolidation, vehicle purchases and day-to-day expenses.


When used responsibly, HELOCs can benefit consumers through low interest rates, convenient access to funds and flexible repayment terms.


Unfortunately, the convenient features of HELOCs can encourage consumers to add too much to their debt load.


In fact, 27 per cent of those who responded to FCAC’s survey said they make mainly interest-only payments on their HELOCs. Considering that, on average, Canadians owe about $65,000 on their HELOCs, this means many homeowners end up carrying debt for long periods.


So, if you have a home equity line of credit or are considering getting one, you need to ask yourself:

  • Would a HELOC tempt you to use your home like an ATM?
  • Could you still afford HELOC payments if you lose your job or interest rates go up?
  • Are you prepared to stick to a plan to pay it off fully, and avoid continually borrowing against your home equity?

Those are just some of the questions to consider before borrowing money that will be secured by your home equity.

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Identity Theft

Identity theft has been on the rise so I thought I would share some information to protect yourself from identity theft.

How to Spot Identity Theft

  1. Review your credit report regularly to spot suspicious account openings.
  2. Check banking transactions regularly. Report anything strange immediately.
  3. Recognize, and look into it, if youre not getting important pieces of mail (i.e. bills, bank statements).
  4. You are receiving calls from debt collectors about debts that aren't yours.
  5. You get a notice that your information was compromised at a place you do business with or have an account. 

How to Protect Yourself

  1. HTTPS. Purchasing or putting your information into a website that does not have the prefix HTTPS means it is not secure. Watch out for sites that only have HTTP.
  2. Secure your mail. Do not leave any trace of information on credit card statements, utility bills, and the like. This is a strategy lots of thieves use to gather information from you. Shred anything that has your name and address on it.
  3. Read your credit card statements thoroughly and often.
  4. DO NOT EVER give personal information such as your SIN, DOB, and banking information away without 100% knowing who you are talking to - even if they are threatening you with legal action or imprisonment. 

Here is a true story:

I recently had some clients who had their house up for sale and received an offer. They were so excited and went off to put an offer on the home of their dreams. When it came time to get their mortgage financing in place, the mortgage insurers declined the client. We couldn't understand why as they had solid employment, great credit, no debt and their own funds for the down payment from the sale of their home.

After digging a little more, we pulled their Trans Union credit bureau, which is what the insurers pulled and saw that a credit card with a limit and balance for $22,000 was outstanding for 4 months and was heading to collections. When this was discussed with the clients, they noted it was not theirs. So, I directed them to reach out to Equifax and Trans Union and do a fraud inquiry. Here is what was found out:

The credit card had been open for 14 years ago, each time, drawn down and paid in full. When this typically happens, the lender keeps increasing the limit until it reached $22,000. At this time, they had taken a cash advance for 22k and walked. The mailing address of the cardholder was Montreal Quebec. The client had never lived there. They thought this would be cleared up quickly but to their surprise, it could take up to 6 weeks so no lenders would proceed with their purchase. They had to walk away from the offer on their dream home as they couldn't get new financing till the fraud was cleared up and they also had to walk away from the sale of their home as they would be homeless.

This is just a prime example of starting your preapproval process early so that any surprises can be detected early on.

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Worried about rising interest rates affecting your mortgage?

(NC) With the Bank of Canada recently raising its key interest rate once again, many of are concerned about the impact on our household debt and mortgages. Fortunately, there are many tips and tricks for saving and budgeting you can use for other areas in your life.

Try the three-category budget. It can be overwhelming trying to track all your expenses, but it is advisable to have a baseline to check your progress. Money experts recommend picking just three categories you want to focus and get a handle on, since most of us overspend in just one or two categories. The three-category system is an easy way to get started on trimming expenses.

Pay down high-interest debt. One in three of us sometimes buy things we can’t afford. If you’ve put a few too many purchases on your credit cards, a big portion of your monthly payment are going just towards paying down debt. To get out ahead, consider moving the debt to a low-interest option, like a line of credit. When paying off any debt, prioritize the higher-interest loans you have and work your way down.

Boost your education. If you don’t know much about personal finances, you’re not alone. A recent survey by the Chartered Professional Accountants of Canada revealed 49 per cent of Canadians grade themselves C or lower on their overall personal financial skills. But it’s hard to get your budget on track when you don’t have the right tools or knowledge. Do some research and work with an expert like a chartered professional accountant to get a better handle on your income and expenses.

Work together. If you’re married or are splitting expenses with a relative, you need to be on the same page about spending and savings goals. So, sit down to outline your priorities together and create a realistic budget you both feel comfortable with and can stick to. You can even try an online budgeting tool or app to help you both track and understand expenses.

Find more information and resources to get on a path of long-term financial health at cpacanada.ca/financialwellness and also request a free educational session for any organization you’re part of.

 
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