Canadians are tapping their home equity with payments that rival rent costs just a few years ago. TransUnion credit data shows monthly home equity line of credit (HELOC) payments have surged in Q3 2021. Making the increase more impressive is this occurred with falling interest costs. Canadians are betting high home prices are here to stay, and leveraging up that equity. This makes the country’s dependence on high home prices deeper, increasing risks.
Canadian HELOC Payments Increased Up To 6%
Canadian homeowners without a mortgage are carrying large monthly HELOC payments. The minimum payment for this segment reached $594 in Q3 2021, up 1.4% from the previous quarter. Payment obligations have increased 6.1% since last year and are up 16.9% over the past five. Considering how much interest costs have fallen, it’s a big increase in the debt carried.
Canadian Homeowners Borrowed More HELOC Debt As Interest Costs Fell, Driving Higher Payments
The average monthly HELOC payment for homeowners with and without a mortgage.
Source: TransUnion Canada; CMHC; Better Dwelling.
Canadian homeowners with a mortgage carry smaller HELOC payments, but they’re fast-growing. Their minimum mortgage payment reached $390 in Q3 2021, up 0.7% from the previous quarter. Since last year, payment obligations have increased 3.7% and are up 7.8% over the past five year. Large growth, especially when you factor in falling interest costs. It might just look small in contrast to what those without a mortgage are carrying.
Canadian Homeowners Are Using HELOC Debt To Increase Leverage
There are a few reasons to note why those without mortgages carry large HELOC payments. Funding retirement is an obvious one, since HELOCs are cheaper than reverse mortgages. With a little income coming in for regular payments, HELOCS can make more sense than reverse mortgage debt. Reverse mortgage credit is one of Canada’s fastest growing segments of credit growth. This shouldn’t be a surprise.
Canadian HELOCs Are Growing After Absorbing Rate Cuts
The annual change in the average monthly HELOC payment for homeowners with and without a mortgage.
Source: TransUnion Canada; CMHC; Better Dwelling.
Loaned down payments, buying more property, and tax reductions are substantial contributors. The Bank of Mom & Dad, an unregulated lender that’s a little dicey but makes the best cookies, has seen significant growth. Borrowed and gifted down payments help fund nearly 30% of first-time homebuyer purchases. With an average gift size of $80,000, few households are sitting on that kind of cash. Borrowing home equity or tapping their retirement are popular moves to get that money.
Increased leverage to buy more property has become more popular. More lenders are suggesting HELOCs to purchase investment properties and vacation homes. Not just small lenders, but Big Six banks pitch people on the idea of using a HELOC for a second home as well. Investors represent a large share of purchases. A good chunk of HELOC debt is used to help make those investments in more real estate.
Converting mortgage debt into investment loans with tax-deductible interest is popular. It’s not talked about often, but the Smith Maneuver has been flying under the radar for the past 40 years. This involves converting mortgage debt into HELOC debt, and using it as a tax-deductible investment loan. The idea is the HELOC debt will not be repaid, since it lowers the homeowner’s taxes. Tax-free capital gains on a primary residence and turning a mortgage into a deductible loan. And people say the system isn’t slanted towards homeownership in Canada.
Some homeowners borrow since home prices have outpaced disposable income growth. What’s the fun of living in a $2 million home with a median income that could never purchase it?
Ultimately, all of these points indicate the same rising vulnerability — leverage. Home prices made rapid gains that may or may not stick around, but owners think they will. The longer home prices rise, the more the economy becomes dependent on those gains.
I wonder how leveraged Canada is right now, because clearly they aren’t counting everything if HELOC debt is being used to buy stocks and more homes, but they’re considered ‘gifts”
We also have the more popular use: hotubs. The whole hot tub industry is based on people drawing from their HELOC. l,
Investors are putting 45%-50% down on overpriced properties, convinced that prices will never fall.
I’ve seen many 2 million dollar properties where the banks are asking for 1 to 1.3 million down.
A couple of mortgage brokers told me that 80% of the deals they see now aren’t even accepted by the banks as conventional loans and go to a CMHC loan. All with 40-50% down payments.
The Market cannot continue like this and there will be a correction.
A correction has been predicted since I was spinning numbers in a circle to make a phone call. At some point you have to accept that the Canadian housing market is centrally planned. The central banks dictate whether prices rise or fall based on interest rates, which they control. For example, negative real interest rates = house prices increase. If we assume 10% house price appreciation is average then current mortage rates at 1.5% to 2.5% are about -8.5% to -7.5% in real terms. That means house prices will go up. Unless the central bank changes course and jacks interest rates way up, housing prices are not going to correct.
The market decides interest rates based on the risk level of the borrower. The CB cannot control the private mortgage market.
What about when the CB purchases mortgage backed securities? Doesnt that drive mortgage rates down?