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.
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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