Canada

Canadians Withdrawing Home Equity Is Accelerating… Again

Canadians aren’t shying away from borrowing against their homes, even with higher interest rates. Office of the Superintendent of Financial Institutions (OSFI) filings reveal the balance of loans secured by real estate has reached a new high in August. Slowing home price growth and a higher cost of borrowing did little to slow down growth in this segment. In fact, the pace of growth has started to accelerate.

Real Estate Secured By Residential Real Estate

Today we’re looking at loans secured by residential real estate. This is when homeowners use their home equity to secure a loan, usually at a lower rate than an unsecured loan. It’s one way to tap your real estate wealth, without have to sell your home. These include home equity lines of credit (HELOCs) and other similar products.  Banks typically divide them into two types, personal or business.

Both types work the same way, but the growth means very different things. Personal loans secured by real estate are generally for consumption or leverage. The more of these issued at the top, the greater the risk of shock to these homeowners in the event of a correction. These are no bueno. Business loans secured by real estate on the other hand are considered good. After all, a business borrowing is a calculated risk to make more money. Generally speaking, we want lots of business loans and want conservative use of personal ones.

Canadians Secured Over $290 Billion In Loans Against Their Homes

The total amount of debt secured with residential real estate reached a new record. The outstanding balance hit $290.98 billion in August, up $1.29 billion from the month before. The annual pace of growth reached 4.42%, nearly 2 points higher than it was last month. Let’s break this down to see where the growth is coming from.

Total Loans Secured With Residential Real Estate

The total of personal and business loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

Personal Loans Secured By Real Estate Reached Over $262 Billion

The balance of personal loans secured by real estate reached a new all-time high. The outstanding balance reached $262.05 billion in August, up $1.2 billion from the month before. The annual pace of growth reached 6.06%, which is actually pretty close to the same pace of growth we saw last year. Psh… and you thought Canadians might be have slowed down on the credit binge.

Personal Loans Secured With Residential Real Estate

The total of personal loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

Business Loans Secured By Homes Reached Over $28 Billion

Business loans secured with residential real estate is falling. The outstanding balance of these loans reached $28.92 billion, up $90.69% from the month before. The annual pace of growth however is 8.43% lower than the same time last year. It’s still negative, but the annual rate has improved from last month.

Business Loans Secured With Residential Real Estate

The total of business loans, secured with residential real estate.

Source: Regulatory Filings, Better Dwelling.

Borrowing against home equity is accelerating, while general credit growth is slowing down. HELOC growth isn’t a problem by itself, but it’s easy to get into trouble with these loans. Personal HELOCs don’t need rigorous income verification and are callable if home values fall too much. That could become problematic as general credit slows, and puts a drag on home price growth.

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31 Comments

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  • Yash 4 months ago

    Perfect news. If rates get hiked today, even more lambs get slaughtered.

    • someguy 4 months ago

      LL, wherever you are, your “no possibility” event has now come in.

      I wish I had a nickel for every time somebody was 100% sure of something that wasn’t so.

      • SMH 4 months ago

        Yes, where are you hiding now LL? We’ll probably be able to find him at the nearest Pay Day Loans 😀

  • Bluetheimpala 4 months ago

    Bubble bubble, toil and trouble
    What will emerge out of the rubble?
    paper people, can’t get touched
    the flame is lit, sit back and watch

    On a serious note, if you know anyone, on a fixed income specifically the elderly, see if you can help them now and understand their 6-12-18 month forecast. If this gets bad and the wolves come out the game will flip from customer retention, i.e. haircuts, to distressed debt where they write it down for the tax benefit and then sell it off for pennies. the kind of companies who buy this debt WILL do everything in their power to make a profit and that will include forcing folks out of their houses. Politically our banks will wash their hands of this and tell the populous “We took the hit and sold these, whatever happens after is not our problem”. This isn’t a tomorrow thing or a next month thing but I can assure you if you don’t have a plan now, waiting for the shit to hit the fan will not work in your favour. Tick tock. BD4L.

    • SUMSKILLZ 4 months ago

      Elderly on a fixed income…hummm. Sadly, my mom will loose her modest house in the next year or so. Goddam HELLOC + a refusal to sell = Bankers win. At least she had fun traveling the world.

    • Ian 4 months ago

      Not seeing Canadians bank turning predatory to their interest payments. They will become predatory and squeeze taxpayers though.

    • Enough of this.. 4 months ago

      Echo of the past… I remember walking into the newly leased LA space the FDIC had taken in 09 discussing failed debt portfolio acquisition. Stunningly, they had no idea how they were going to handle the flood of defaults with greater attention placed on the bank failures. The flip side of the coin was entirely different. Cash was ready to execute and to your point, the players were ruthless. E.g. City National.. Strongly believe the shadows are firmly queued to perform in similar fashion when the hit finally comes up here. A lot of the players go as far back as S&L and they’ve eclipsed any return made by anyone in the best of times during the worst

      These cycles are very real and everyone needs to pay attention

      • Enough of this 4 months ago

        I’m not suggesting the CAD banks will default btw.. They’ll be fine.. that’s a certainty

    • vnm 4 months ago

      Brilliant! A rocks, scissors and paper game, but without the scissors. Since cutting interest rates isn’t an option.

  • Van Living 4 months ago

    Gotta get a new car to go with that $1 million home, otherwise you’re just a loser.

    • Bluetheimpala 4 months ago

      “It’s a Roli not stop watch, don’t never stop” – Drake / Uncle Tony. Tick tock. BD4L.

  • Polozed 4 months ago

    Boom! Bank of Canada just raised rates. These folks are toast.

    https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

  • TO Planner 4 months ago

    Enjoy the last rate hike before the aggressive slashing begins.

    • Brad 4 months ago

      Good luck with that bud, the rates are going to be moving up at a set pace if you actually read the minutes. The BoC has their hands tied because they left the rates low for too long and never should have cut in 2015. Now that the US is going to be a constant raising path Poloz has to follow, otherwise inflation runs rampant and creates an even larger problem.

      Sorry that your sales numbers are going down, but you’ll need to get used to it.

    • neo 4 months ago

      We are still at least 12-18 months away from a recession so aggressively slash for what reasons. They are behind the curve not ahead of it.

      • Investor 4 months ago

        What do you know? Try to read some educative comments above at least.

    • vnm 4 months ago

      Yes, the market is starting to correct, but don’t expect aggressive price slashing. Despite being increasingly underwater, RE investors will cling onto the dream to the last fingernail. There will be an initial shock, but prices will likely fall by only 10-15% a year over 3-4 years, with intermittent small spikes, like a drowning clown gasping for air..
      Bubbles don’t pop in the usual sense of the word, they slowly deflate, … they grind, and grind, and grind some more … like an old clock when sand gets into the mechanism.

      • Brad 4 months ago

        Except for the 1 in 3 Canadians who are saying they may look at a variety of bankruptcy options if the rates keep moving up. Canada hasn’t seen this level of debt before and there are a ton of people on the brink who are going to have to liquidate. We’ve seen this before in the early 90s.

    • MH 4 months ago

      “The Bank of Canada pressed ahead with a fresh interest rate increase, and acknowledged for the first time in more than a decade that it expects to completely remove monetary stimulus from the economy.

      The Ottawa-based central bank raised its overnight benchmark rate by a quarter point to 1.75 percent Wednesday, the third hike this year and fifth since it began increasing rates in 2017. More importantly, its statement dropped references to taking a “gradual approach” and added language about the need to bring rates to levels that are no longer expansionary.”

      https://www.bloomberg.com/news/articles/2018-10-24/bank-of-canada-raises-rates-says-move-to-neutral-will-be-needed?srnd=premium-canada

      • Raging Ranter 4 months ago

        Given how cautions and timid Poloz has been, his actually stating that speaks volumes. Low rates are gone, even if we have another recession.

        • MH 4 months ago

          My thoughts exactly. The new guidance is extremely hawkish.

          It looks like one of those “head for the hills” moments.

        • vnm 4 months ago

          Great point. And despite over-leveraged investors losing their shirts in the early 90s recessions, interest rates went up, not down.

    • Raging Ranter 4 months ago

      TO Planner, this might shock you, but central banks have priorities other than propping up the value of real estate. They don’t exist exclusively to preserve the value of your home.

    • carlton 4 months ago

      Sure buddy! keep wishing, you better sell now.

  • Bluetheimpala 4 months ago

    Anecdotal comment/question, if anyone has observed the same please let us know: I’m hearing A LOT more in the media about interest rates and debt levels. Over the last few days it seems like the CBC is mentioning finances/debt/rates more than before. I don’t watch cable TV so I have no idea whether the nightly news is pumping anything. Tick tock. BD4L.

    • Brad 4 months ago

      The largest news has really been how 1 in 3 Canadians are worried about, or looking into, bankruptcy and consumer proposal options as the rates tick up… meanwhile the rates have only started.

  • Grizzly Gus 4 months ago

    So an interesting story I heard from one of my do it yourself banker friends (private lender). Some broker he works with from time to time connects him with the following potential client.

    Bought a home that was 1 year old in 2010 for about 250K. Today he has three mortgages on the place with a total outstanding debt amount of about 500k. Has missed a few payments on his primary mortgage and the lender will soon be commencing the power of sale process. The borrower is looking to refinance the loans into one big mortgage that would bring the balance to about 530k on a one year term. This would have commited about 55-60% of the income to debt servicing at the 15% interest the mortgage broker had suggested. He and his wife actually both had decent enough paying jobs………..He also has 18k in credit card debt. The house is estimated to go for about 600k if it were to be sold. I won’t say where the house is located but I think that is an ambitious price.

    My friend went to interview the guy to figure out what the fuck happened……………… none of the money went to investments like stocks or additional property………..had nothing to show for the money other than a foreclosure warning. The guy’s explanation was that most of the debt increase had come from fees every time he refinanced (bull shiza!) and that he had made some mistakes in the past. My friend told him he should just sell, clear debts, rent, and regroup. Guy told him that he and his wife (also have three teenage kids) wanted to refinance so that they could sell the property in a years time……………. I guess they are forecasting a “hot” spring market and a return to April 2017 prices………… My friend declined lending him the money.

    Anyway, sad story (and will get sadder) , but goes to show how weak some of the hands out there are. Hopefully (for the sake of our country and all of us) there are not too many people out there in a similar situation, however those recent reports about how many people are starting to fear bankruptcy leads me to believe that there is.

    As the tide goes out we will see who was swimming naked.

    • Bluetheimpala 4 months ago

      Thanks Grizz. I wasn’t gonna bust this out until I had some more recon but here we go: At the corner of 9+7 in Mono (maybe mono mills, it gets weird in the country) there is a mansion that started in the late spring (I eye rolled for two weeks straight…who is doing construction in 2018!) and has stalled completely from what I can tell. Nothing has changed since they put up the bricks and the roof…over a month ago. The barrier is falling over in one part and hasn’t been fixed but the opening is still locked. Someone came to grab the tiny excavator about 3 weeks ago. I pass by the place twice a day and the car, white accord coupe hasn’t moved at all in about two weeks. I’m giving it another two or three weeks and then calling the cops…I don’t see any coyotes milling around so I’m hopeful they just walked away. Tick tock. BD4L.

  • vnm 4 months ago

    April 2009: “Canada may have come late to the global recession, but the economic downturn is hitting the country with a force that is unparalleled in post-war economic history.

    “https://www.policyalternatives.ca/publications/reports/exposed-revealing-truths-about-canadas-recession

    This is revealing about why the BofC reduced the prime rate from 6% to 2% between 2008 to 2009 … economists were worried about a total world financial meltdown, and that Canada was totally unprepared for it, particularly in terms of debt.
    Considering that the debt situation is far worse now it’s little wonder so many people feel they are at the edge of a cliff, and likely rightly so.

  • DannyBoy 4 months ago

    Things are going to get very interesting…and its just starting guys.

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