Canadian homeowners love spending their home equity, but how much is left for an emergency? Bank of Canada (BoC) data shows homeowners have drawn a little over a third of available HELOC credit in Q4 2019. That doesn’t sound bad, until you realize what the distribution looks like. A significant number of homeowners were already borrowed to the max before the pandemic was declared.
HELOCs
A home equity line of credit (HELOC) is a form of credit secured by your home equity. By securing the loan with a home as a guarantee, there’s a lot less risk for the lender. Consequently the lender can do fewer checks on your ability to pay it back, and charge lower interest rates. It’s a low hurdle, low cost way to tap your home equity for an emergency. Of course, like with all forms of debt, this one can get real sloppy, real fast.
The Government of Canada warns there’s a few issues to consider with HELOCs: over-borrowing, debt persistence, wealth erosion, and uninformed decision making. Since there’s little risk for the lender, it’s extremely low friction. This may cause a number of people to fail to consider the usage. All of these issues are amplified further after periods of rapid home price gains. In the event prices go past fundamentals and correct, homeowners may be left with a lot less equity than they believed they would have. In a common but boring scenario, this can hamper someone’s ability to move. In more serious situations, it could compound a situation where a homeowner falls into arrears.
Canadians Have Tapped 35% of Available HELOC Funds
Canadians have some room to borrow in an emergency, but a good chunk has already been tapped. The new J2 bank filings show $206 billion in HELOC funds were used at the end of 2019. This is out of an estimated availability of $516 billion in the same quarter. That’s 35% of the total available credit being utilized. The BoC estimates the remaining $310 billion available is about the size of 20% of household disposable income. This is important, because these homeowners may need to tap these funds during this economic downturn.
A Fifth of People Tapped Over 80% of Their HELOCs
Distribution tells a more nuanced story, with some people barely using their debt and some maxed out. BoC calculations show 45% of HELOC accounts have tapped less than 10% of available funds in Q4 2019. Another 7% of accounts have used more than 10% of their credit, but less than 20%. Overall, this means the majority of people have used less than a fifth of their HELOC credit. That’s the good news looking at this distribution trend.
Canadian HELOC Usage Q4 2019
The percent of accounts by range of utilization for Canadian home equity lines of credit in Q4 2019.
Source: BoC, bank filings, Better Dwelling.
The bad news is the other side of that stat, where people were pushing the maximum amount of credit. BoC staff calculations show 17% of accounts in Q4 2019 tapped between 90 and 100% of their credit. Another 5% of accounts tapped more than 80%, but less than 90%. Over a fifth of accounts have drawn 80% of their HELOC funds by the end of last year.
These filings cover pre-pandemic numbers, and more credit has likely been utilized since. Most households had HELOC credit available to help them in this downturn. However, a big chunk of homeowners were pushed to the maximum of their utilization. The BoC expects arrears rates to triple next year, with the climb starting in the fall. This is when payment deferrals start to expire, and presumably when even more people will have maxed out their HELOCs.
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Put it on the HELOC, treat yourself… No Big Deal… Right? What could happen as house prices in Canada are not subject to downturns, well that was the narrative RE Agents were pitching for years.. Let’s wait and see what there tune will be in the upcoming months, CREA needs to have a external investigation conducted on them!
Opaque sales information, no major audit, and forecasting future asset prices would be a crime in any other country. There’s no other other financial transaction where the industry can advise you of something, and not show you what the work behind it is.
Basically enough of the market is in a dangerous position, if people stopped believing the narrative that prices go up, the market would crash.
Yeah, people who used their homes as an infinite credit card are going to pay hard for it. “But but… Toronto is the next New York…”
Okay…
Owning a home is the only key to wealth. Once you get it, you get an infinite supply of money. Haha
LOL… well I guess, if your IQ tops at mid double digits on a sober day.
I wonder how many of those maxed out are also used it as leverage to buy another home.
I assume that the entirety of those in the 80% to 100% segment all had used them to buy other homes and that the 22% (17 + 5) consisted of many of the same people who had bought many many properties over and over. Poor banks…those people that took advantage made sure to get at least 20% down on the investments they bought with those HELOCs so that they would not have to pay a premium on the loans (as 20% would mean no CMHC fees) meaning that the banks are on the hook not just for the loss of equity but also on the HELOCs that they also gave them. This stinks of the same kinds of fraud that happened in 2008.
Fear not. Canadian taxpayers have bottomless pockets, they will save poor banks from the consequences of they lending decisions. Government will rather bankrupt working Canadians ten generations forward than allow a single dollar drop from the bonuses of banking executives.
It’s a crazy assumption that the bought other assets. They went to dinner in the new BMW, wearing Comme de Garcon t-shirts while buying trips on their phones to the Mayan Riveria. If they bought other real estate they can sell it and get what they can get. Its better than a Senior Frog t-shirt.
Actually the banks are still protected for a majority of mortgage loans below 80% ltv. A large portion of those loans are portfolio insured by guess who? Yep the CMHC.
If $150 billion can be handed out by Poloz from taxpayers pockets to purchase junk mortgages from banks at 100 cents on the dollar, why not bailouts for house flippers and HELOC maxxers too.
Agreed. Not because the system let them down. Because it’s the right thing to do.
can anyone tell me what happens to HELOCs when equity goes down? I havent been able to get a response from anybody I know.
You still owe that money
They reduce your hELOC and put in a demand letter for the balance outstanding..then you negotiate the terms 1 day to 80 months +++. Then instead of going shopping with your HELOC you go shopping for a better mortgage and HELOC except.. The other bank will need an assessment before signing you. good luck. You guys are screwed..
@ Rustinpiece, HELOCs can be called for repayment or credit limits arbitrarily reduced at any time at the discretion of the banks.
In the business world what the bank does if you have borrowed money on your business commercial property and the value drops below the amount you have borrowed and the mortgage. What the bank will do is increase the interest rate if you are on a variable rate and if you are on a fixed rate, they will force you to sign a debenture on all your business machinery, stock, fixtures and fittings effectively become a partner in your business.
This is what happened to me in the 90s when the interest rates shot up and values slumped during the recession.
Good thing I am in that segment that do not use their HELOC. I have 20 k sitting for emergencies. I prefer to live debt free now that my vehicles are paid for. Entertainment can be free when exercising or gardening. No need for vacations because I already live somewhere nice.