If you’re well familiar with the Home Equity Line of Credit (HELOC), the federal government’s Financial Consumer Agency of Canada (FCAC) has a warning for you: it’s not a money machine. In fact, it could be the debt millstone that finally drags you under.
HELOCs are offered by pretty much every one of Canada’s major banks, and others besides. What they do is to let you borrow money against the equity you hold in your home — in other words, tacking on new homeowners’ debt over and above your mortgage.
For financial institutions, you could call it having your interest cake and eating it, too. Banks could easily be in a position where they collect interest on your mortgage, while also collecting interest on money advanced against equity you hold in your home. They’ve got you coming and going.
The problem is, while such loans may provide advantageous interest rates and quick access to needed funds, it looks like Canadians might be getting hooked on the loans.
In a report released Wednesday, FCAC pointed out that the lines of credit are growing rapidly. The number of households that hold both mortgages and HELOCs has grown by 40 per cent since 2011, and users aren’t exactly trying to get out from under the debt, either.
Forty per cent of loan holders don’t make regular payments on their debt, and one in four either pay off only the interest or make the minimum payment possible.
Most people who get the lines of credit don’t manage to pay the debt off until they actually sell their homes, meaning the debt — and its interest payments — are the homeowners’ constant companions.
How big is this line of credit mountain? At the end of 2016, the outstanding balance in Canada was $211 billion, with an average balance of $70,000. (The FCAC says homeowners use the funds for a variety of purposes, loosely summed up like this: home renovation and consumption, 40 per cent; investments, 34 per cent; and debt consolidation, 26 per cent.)
That debt is on top of mortgages, credit card balances, car loans, and every other means by which Canadians get their credit.
And that extra debt has big economic risks. Does this sound familiar, Newfoundland and Labrador?
“Highly indebted households tend to reduce their spending disproportionately more than less indebted households in response to an economic shock (e.g., oil price collapse). When more severely indebted households cut back, it reduces demand for a range of consumer goods (e.g., automobiles, furniture), which can increase the impact of the shock by curtailing investments and increasing unemployment.”
Other risks include homeowners finding themselves with homes worth less than the debt they hold, should the housing market fall.
The message from FCAC is clear: borrower beware.