More Canadians are using their homes to get some extra cash in their pockets. For the first time ever in Canada, the home equity line of credit (HELOC) debt soared past the $300 billion mark, according to the Office of the Superintendent of Financial Institutions (OSFI).
This type of loan is obtained by using the equity you have in your home. Canadians are using the cash for everything from travelling to starting a business. By pledging the equity in your home to a lender, you are likely to get a better interest rate and better loan terms. But if you default on the loan, you stand to lose a lot—namely, your home.
Of that $300 billion, more than $268 billion is being used for personal purposes. The debt is now more than 5 percent higher than it was at the same time last year.
Surge in Borrowing
After home prices began to escalate a few years ago, HELOC debt began to rise, so much so that the federal government became a little concerned that all that borrowing might put some homeowners in precarious positions.
A Financial Consumer Agency of Canada (FCAC) report indicated that lenders have also been offering homeowners readvanceable mortgages, which combine term mortgages with HELOCs and other credit products.
The FCAC says, with responsible use, the HELOC portion of readvanceable mortgages can provide many benefits to consumers, such as low-interest rates, convenient access to funds and flexible repayment terms. However, it also allows consumers to make interest-only payments, which can result in homeowners carrying debt for a longer time. It can also encourage consumers to add to their overall debt, which could put stress on households at a time when Canadians are carrying record amounts of debt.
At a glance:
- The FCAC says that banks have indicated that readvanceable mortgages are now the default option offered to qualifiable mortgage clients with down payments of at least 20 percent;
- Of the nearly three million HELOC accounts in 2016, 80 percent were held under readvanceable mortgages;
- The number of households having a HELOC and a mortgage secured against the equity in their home has increased by almost 40 percent since 2011;
- About 40 percent of clients don’t make regular payments against their HELOC principal;
- About 25 percent of clients only pay on the interest or make only the minimum payment;
- Most clients don’t repay a HELOC in full until they sell their homes.
As it stands now, personal loan growth is now outpacing home price growth and analysts don’t expect any major changes to this scenario for some time.