Tuesday, June 20, 2017

More and more Canadians borrowing against their home equity

According to some Many Canadians may now be turning to their home equity as a way to raise money to fund a lifestyle that could be unaffordable for some.

A recent article in BNN points out that more and more Canadians are using their homes as if it were an ATM from which they could withdraw. Since 2011 the number of Canadians who have taken out a home equity line of credit (HELOC) has risen by 40 percent. As many householders are still paying on mortgages and other debts such as car loans, the added debt can sometimes not be managed. Many are not able to even make regular payments on time.
The Financial Consumer Agency of Canada's(FCAC) commissioner Lucie Tedesco said: "At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households." The Agency's report says there are about three million HELOC accounts in Canada, and the average outstanding balance is $70,000. Canada's debt to income ratio has now risen to record levels even higher than that in the US before its 2008-9 housing crash. Should there be an unexpected economic shock many households could be vulnerable and end up losing their homes.
The agency report actually shows that about 40 percent of consumers are unable to make regular payments towards the HELOC principal. Most consumers are unable to repay their HELOC until they sell their homes. The report note that banks were combining term mortgages with HELOCs and other products to customers, creating complex products that customers often did not understand too well. The FCAC report said: "Banks reported to FCAC that a readvanceable mortgage is now the default option offered to credit-worthy mortgage customers with down payments of at least 20 per cent,."
Some analysts fear a housing bubble, especially in areas such as Toronto and Vancouver, but unlike the US, Canada does not have much of a sub-prime mortgage market where loans are made that are quite risky nor does it have the complex credit products that fooled borrowers and investors in the US housing crash. However, the report shows clear signs that there are dangerous trends in Canadian's borrowing based on their home equity. The appended video shows prices in the Toronto housing market have declined recently due to government policy.
There are several other ways that you can borrow against the equity in your home as well as a HELOC. Many people choose to take out a second mortgage or a reverse mortgage. The options are outlined here.
The Mortgage Professionals Canada put out a report in which their chief economist William Dunning shows that 1.91 million Canadians now have a HELOC a lower figure than FCAC it would seem. Perhaps many who hold the accounts are not Canadian. The report estimates that 21 percent of Canadians who purchased their first home before 1990 still have not paid off their entire mortgage. One percent of those who bought homes between 2014-216 actually have negative equity in their homes. 4.3 million Canadian homes have a mortgage but 3.57 million homes have neither a mortgage or a HELOC. There are fully 1.48 million Canadian homes with both a HELOC and a mortgage. Canadians take out a HELOC not just because they need cash. A full 28 percent just used the HELOC for debt consolidation a smart move with low borrowing rates. Another 31 percent used the money to actually invest in the house for renovation and repair. Only 9 per used the credit for general purchases and finally 9 percent claimed to use it for other reasons. It would seem that many use the HELOC in quite sensible ways and only a small minority to finance what may be an unaffordable lifestyle.

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