Canadians are burning through the real estate equity they’ve acquired. Altus Group, a real estate consulting firm, estimates over $17 billion in home equity was borrowed for renovations in 2017. Not all that surprising, or a shocking number if you’ve been following the debt binge. The interesting thing is the majority of these borrowers are older Canadians. Like, a quarter should be retired old… an odd time to take out a callable loan while the cost of servicing that debt is rising.
Home Equity Line of Credit (HELOC)
Regular readers can skip this, but for the rest of you need to know what a HELOC is. A home equity line of credit (HELOC) is a type of loan that’s secured by the equity in your home. Secured borrowing has a low interest rate, making it popular for financing large buys. The loans are typically variable rate, meaning interest rises and falls with market. The loan has become a hit with cash poor, house rich Boomers.
Canadians Borrowed $17 Billion of Home Equity To Renovate
Altus estimates a huge number of renovations are being paid for with borrowed equity. Over $17 billion in home equity was extracted for renovations in 2017 alone. For context, $259 billion in HELOC debt was outstanding last year, up $16 billion from the year before. Altus notes that not all of the home equity was extracted through HELOCs. Instead, many people refinance their mortgages, and increase their balances for renovations.
Canadian Renovation Spending
The dollar value spent on residential renovations, and Altus forecast.
Source: Altus Group. Better Dwelling.
A Quarter of These Borrowers Are Seniors
First-time buyers need to renovate a run down property, makes sense – right? Except these probably aren’t first-time buyers. Most of those borrowing HELOCs for renovations are actually older Canadians. The largest segment was between 50-64 years old, which represented 38% of the borrowers. People aged 65+ is also interesting, coming in at 25% of borrowers. That’s right, 63% of borrowers were 50+, and over a quarter should be retired.
Canadians Borrowing HELOCs For Renovations
The percent of Canadians that borrowed a HELOC for the purposes of a renovation in 2017.
Source: Altus Group, FIRM Survey. Better Dwelling.
The borrowing by itself isn’t an issue. The concentration, type of loan, and borrower in this combination might be. Over a third of all HELOC debt is in Toronto and Vancouver, two markets that saw a very quick rise in prices. HELOCs are demand loans, meaning banks can call them in if prices were to correct. These are older people in, or approaching, their fixed income years. Older Canadians are taking out callable loans, at peak valuations, with the cost of debt rising… while approaching retirement. All to renovate their homes. It’s probably nothing.
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Great article. Boomers are one of the biggest x factors in all of this. How many of them are dependent on their home funding their retirement? Assuming most of those above are, or they just have zero plans to ever retire. Work till you die baby
A boomer recently told me you don’t pay HELOCs back, they rising value of your home wipes them out when you sell it in a year or two. They have an exit strategy, it’s just one that’s extremely dependent on real estate values rising until after they die.
When faced with further declines, and most likely a recession in 2019, what will this cohort do? We don’t know. Some will stay put and just watch their equity erode, maybe ending up destitute at the tail end if they live too long (funny how life is now a burden…). I read a great quote yesterday: “We’re experiencing the biggest transfer of equity to debt in history.” Tick tock. BD4L.
I read a similar quote the other day but it read like this: we are currently experiencing the largest transfer of debt to equity, meaning those taking out massive mortgage loans today are giving those funds to boomers who are selling their nest egg and cashing out.
The last 10 years have been hard for people like me who are careful with their money. I’d like a government that wishes to build long term and sustainable economy and quality of life, but short-term oriented policy for insiders and risk-takers has created systemic risk, and now we all will suffer.
This is why everyone has been piling into real estate. The government is failing to create other investment opportunities that aren’t specific to big business, and instead have left people to speculate on real estate. The lack of job creation in smaller industries means people are working in smaller, tighter concentrations.
Yes, self-employment is on the rise. But most of the self-employment depends on contracts with big business, and is just regular employment without benefits.
It’s a myth that government creates jobs other than fattening the public sector.
Also your quote “But most of the self-employment depends on contracts with big business, and is just regular employment without benefits.” should really end with “without benefits, but extremely generous tax breaks”
Let’s see. Ma and Pa corner store depends on contracts with Big Business.
Hmmm. Let me think about that one.
Great article, pretty interesting development.
It is really strange that baby boomers are renovating their properties and in my view they either decided to stay longer in their houses or they are getting ready to sell.
You are making a very false assumption.
You are assuming that these HELOCS are being taken out on the maximum equity.
A retiree who bought their home 30 years ago, and was mortgage free, could take out a $50,000 HELOC and not even be close to chewing up their equity. On a $500,000 valuation house, this is reduces the equity by only 10%. Will housing prices drop to the level where this house is only worth less than $50,000? If it does, their pension income will have been reduced to virtually zero, and the HELOC will be the least of their worries. They probably would not even be able to pay the taxes on the house.
And there is always a way out – converting a HELOC to a regular mortgage. The advantage of a HELOC is that you do not have to draw down the full amount. Better to take out a HELOC, and once the final amount is defined, convert it to a regular mortgage. Works for those who do not live in their LOC.
The difference on a $50,000 mortgage amortized over 20 years, between 3% and 7%, is approximately a $100 increase, to $384. A hardship? maybe. A disaster? Doubtful. And they get to live in a house more suitable to their needs. They can live in comfort, instead of living uncomfortably and seeing the equity pass on to their heirs. The modern motto of the retired – ‘May the last check bounce’.
Well said. While I generally agree with the views expressed on BD, this one about senior HELOCs is a non-entity.
Just wondering why these seniors don’t do a reverse mortgage? Isn’t that a safer option if they just want some extra cash? I guess they are betting that the home value will rise and they will sell and cash in even more.
I would *carefully* read up on the specifics of the ‘reverse mortgage.’ Supposedly it is far from the best deal as a product anyone can access.
Admittedly it looks simple and easy, and that’s perhaps why people buy them.
Unfortunately it’s common for people to make all kinds of illogical financial decisions, giving away a lot of the advantage of their wealth to others and entire industries are built to take advantage of this weakness we have – our following the path of least resistance & being afraid of money matters & not really knowing or wanting to know.
Life is a car dealership, basically.
There are HELOCS, and less talked about HOLOCS. Home owner lines of credit. These are lines of credit attached to, say, debit cards. Overdraft protection. They are not taken out on the equity in the home, but one of the prominent questions on the application form is ‘Do you own a home?’ followed by questions about your mortgage and the value of your home. If yes, you have a far better chance of getting a higher limit. It is an implied line of credit based on the assumed equity in your home, although the actual collateral on the line of credit is ultimately a pre-signed letter for garnishment of your wages.
It is one of the ‘hidden’ reasons why Canadians want to own a home, instead of renting. Home ownership represents a greater level of stability, and thus a better credit risk. Your credit will be higher if you own a home, than if you do not, all other things considered. A higher score, means better access to credit.
A recent Ipsos poll discovered that 93% of seniors want to stay in their homes as long a they can. And why not stay there if they still enjoy it? Using that equity built up in your home and obtaining a true Reverse Mortgage from a reputable lender such as HomEquity Bank is actually a smart decision to make.
My advice to seniors is to consider NOT selling their principal residence. Instead, keep this preciousasset and use that built up equity as a tool to create financial flexibility to make your life more enjoyable and stress free.
Funds generated from a bona fide reverse mortgage are tax free and will not have any income tax impact on any pensions you have, or will be receiving.
While a reverse mortgage is still a debt secured by your home and must be repaid at the time you sell, it is a NON RECOURSE DEBT. This means that the lender cannot go after any of your other assets, if funds generated from the sale cannot fully repay the outstanding principal and interest owing.
Fishing in the middle of the desert eh Glynis? Times must be hard.
But on a side note, I will be hiring for my collections agency soon. Feel free to send over your CV and resume.
May the last check bounce.
Better to spend the equity than to see it go to waste.
Thanks for enlightening all the information with pictorial and graphical views. By the virtue of that, it is easy to understand and really an interesting article.