HELOC to pay

Canadian households' debt to income ratio seems to have stopped rising in recent quarters, and even retreated modestly, although it still remains near 1.70, well above the peak level recorded in the United States ahead of the financial crisis.  The housing market has gone off the boil, with the result that mortgage lending growth has slowed.

That's all well and good, but there's another form of household debt that's causing concern for the Bank of Canada: the Home Equity Line of Credit, or HELOC.  As this article  from the Financial Post reports,  the average outstanding balance on these lines of credit is C$ 70,000; a quarter of HELOC borrowers only pay down the interest each month; and the repayment schedules that borrowers describe to the Financial Consumer Agency of Canada (FCAC) look "optimistic".

Borrowing more money against the family homestead when property prices are rising is a time-honoured Canadian tradition, and in a sense the HELOC is just a new way of playing an old game.  In its most benign form, remortgaging is a low-risk way of securing funds for property improvement, and this was the original notion when banks started making HELOCs available to their customers.

The FCAC is now concerned that some HELOC borrowers are not using the vehicle responsibly -- it has become a means of financing day-to-day consumption rather than investing in home improvements.  Borrowers with no clear repayment strategy are likely to find even the interest payments burdensome as rates continue to rise.  In the event of a downturn in property prices, the equity against which the line of credit is secured will start to shrink, potentially creating asset quality issues for the lenders.

For the last decade, household debt has seemed to be a looming problem that never quite erupts, and the rising concern over HELOCs is unlikely to signal an imminent crisis.  However, many homeowners seem quite happy to enter retirement still burdened by mortgages and HELOCs, and there are ads all over the TV encouraging retirees to slap a reverse mortgage on their homes in order to boost their spending power.  The younger generation would be well advised to temper its expectations for a windfall when my own cohort passes on.