Toronto and Vancouver real estate owners are flocking to home equity loans. Canada Mortgage and Housing Corporation (CMHC) numbers show debt payments increased in almost every segment in Q1 2019. The largest growth was in home equity lines of credit (HELOC). Obligated payments for HELOCs grew at almost 3x the rate of the second fastest growing segment of debt.
Obligated What?
Banks and government have shifted households from total debt, to the cost of servicing it. Today, we’re looking at the obligated payments to service that debt. Which is a fancy way to say we’re looking at minimum or scheduled debt payments for various segments. Falling obligated payments often mean more resilience in the event of financial shock. Higher payments mean households are more vulnerable in the event of financial shock. Ideally, everyone but banks, wants to see payments at least rise slower than incomes.
Payments can go up or down for a variety of reasons. If the total debt falls, payments can still rise if interest rates move much higher. If debt loads rise, payments can fall if interest rates drop. It’s important to understand the context of the environment to draw the best insights. Today we’re only looking at the speed of growth per segment, so rate context is minimal. However, there’s a lot of additional insights that can be drawn from the numbers as well.
Toronto HELOC Payments Outpace Mortgage Growth
Toronto HELOC payments are rising faster than any other type of debt held by households. Equifax data show the average HELOC payment jumped to $593 per month in Q1 2019, up a massive 14.48% from last year. To contrast, mortgage payments averaged $1,752 per month, up 5.42% from the same month last year. HELOC debt for Toronto homeowners is growing at almost 3x as fast as mortgage payments.
Toronto and Vancouver Debt Payment Growth
The annual growth rate of the average household debt payment by segment for Q1 2019.
Source: CMHC, Equifax, Better Dwelling.
Vancouver HELOC Payments Outpace Mortgage Growth
Vancouver is also seeing HELOC payments jump faster than any other segment of debt in the region. Obligated payments on HELOC debt reached $667 per month in Q1 2019, up 12.29% from last year. To contrast, mortgage payments reached $1,881 per month, up 4.85% over the same period. Once again, HELOC payments are growing almost 3x the speed of mortgage payments.
Toronto and Vancouver Debt Payments
The average household debt payment by segment in Canadian dollars, for Q1 2019.
Source: CMHC, Equifax, Better Dwelling.
It’s well known Canadians have been flocking to HELOC debt over the past few years. That shouldn’t surprise anyone, especially if you’ve seen the total balance swell. The fact that it’s growing so much faster than any other segment of debt should be a concern.
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To look at this from a different perspective, people are pulling cash out of their home more than twice the pace it’s appreciating at.
Those additional insights are pretty easy. Rates are falling, banks are handing out other types of debt rapidly to make up the loss of mortgage business. Merry Debtmas!
BOC holds rates this morning, and expects higher debt growth.
Not sure how they can say that when they also note that people are making more, but not consuming. Assuming this has to do with their bad read on living expenses, or a bad projection on income growth weighting.
https://www.bankofcanada.ca/2019/09/fad-press-release-2019-09-04/
I have 3 millennial kids, all of whom own homes. They all tell me that having a HELOC is the cool thing to do and that the process of getting a mortgage is a drag and very old fashioned. My guess is that the banks and other lenders have figured this out and now market this product aggressively. That is why, in my opinion, strange things seem to be going on in the debt market. One can only hope that the BofC figures this out before they really screw up. But they probably won’t.
There was an interesting graphic(link below) posted that shows we Canadians owe far more than anyone else in the world to out bloated mortgage debt. You gotta wonder when people will give up and just rent:
https://cme4pif-thoughts.blogspot.com/2019/08/visualizing-bubble-in-canada.html
But how else am I supposed to have the latest $2000 Phone and a brand new BMW? Also what about those trips to (insert destination) 3 times a year? HELOC is for the living hip folks. It’s just free cash that never needs to be payed back…
Why would people choose to pull money out with a HELOC when they can do a cash out refinance at a much lower interest rate. Just curious in case anyone knows. Is it because of the timing needed for refinance?
As I said, millennials love HELOCs and hate mortgages. That is all there is to it.
Shared equity mortgage = govt owning property. going to be a solid support in 500k-600k range in future. No crash for all you doomsday preppers, lol.