HELOCs and household debt

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Brokers are wary about the high level of HELOCs in Canada, and the long-term effect they could have on household debt.

 “I think HELOCs are detrimental to the housing market; people are running themselves up in debt and at least with a mortgage you pay it down,” Gary Green of Mortgage Plus told MortgageBrokerNews.ca. “With a HELOC, though, you can just keep running the credit up.”

Canadian outstanding debt currently sits at $266 billion, according to RBC, a chunk of that in home equity lines of credit.

According to CAAMP’s most recent figures, 22 per cent of Canadians have a home equity line of credit.

And skyrocketing prices in many markets have industry players worried that clients will be enticed to take on more debt than is necessary.

"It's like turning your house into an ATM," chartered accountant and personal finance author David Trahair told the CBC. "If you've got a house, especially in Toronto with these insane values, you can borrow an incredible amount of money against the house."

And while lenders have become more stringent about HELOCs, brokers say they are still easily accessible.

“Lenders have gotten more strict with offering HELOCs but they’re still relatively easy to get,” Green said. “The banks have tightened up and they’re looking at cash flow a lot more these days.”

For his part, James Shinners of Mortgage Managers believes HELOCs can be a good vehicle for clients with high cash flow, though he admits many don’t consider that circumstances can change.

However, it’s another type of credit that Shinners is most worried about.

“I’ve had clients who had mortgages paid off and the banks offered an unsecured line of credit that they’ve had to convert into mortgages to pay off,” Shinners said. “The banks are in it for the money, not for the client, so we always tell clients to call us first to help them decide what is best for them.”
  • Michael on 2015-07-07 10:26:43 AM

    It's not HAVING a HELOC that's the problem. It's just a facility. It's what people *do* with the facility that can (potentially) become a problem. If 22% of Canadians have a HELOC, how many of them use it irresponsibly? Probably a fairly small percentage.

    When you consider the HELOC LVR cap of 65% on top of that, I see much ado about nothing. Remember also that we don't have no-recourse mortgages in Candada like they do in the USA. People can't just walk away if prices drop and their house is overfinanced... Canadians have to ride it out, and thus most people stop selling, and prices recover. A few more than usual will go bankrupt, yes, but that's always happened in any correcting market.

    I totally agree that unsecured personal debt represents a much greater problem. It's barely regulated, compared to real estate backed lending, but PLOC's are entirely the lender's decision to extend credit and should remain the lender's problem if it goes wrong.

  • Tony Romano on 2015-08-13 9:06:08 PM

    What Michael???? Yes a gun is just a "tool", but in the hands of people, it can cause a lot of damage because of you can't change human nature. These companies and banks no this fully well. Hell, they bank on it!

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