Ontario home equity loans get a little more worrying

One in seven borrow for discretionary purchases, even as consumer insolvencies rise

As consumer insolvencies mount in Ontario, a new survey has revealed worrying trends in one of the most popular ways to borrow money, the home equity line of credit, or HELOC.

An Ipsos Reid survey of 2,111Canadians, conducted for Calgary-based insolvency firm MNP Ltd., showed that about one in seven Ontario homeowners with a HELOC admit they have used it to fund discretionary purchases, such as a vacation or new car. One in 10 say they have used their HELOC to fund other real estate investments.

The survey, released Tuesday, also found that 32 per cent of Ontario homeowners have used the funds borrowed to pay down other debts — while 42 per cent have used the money to do things they otherwise wouldn’t have been able to do, such as home renovations.

“It seems there was a time not so long ago when paying off the mortgage was an important financial goal for households,” MNP licensed insolvency trustee David Gowling said. “But today the house is an ATM and the cash withdrawn is being used to pay other bills or to fuel household spending.” “A HELOC might seem like a cheap and convenient mechanism for credit,” Gowling added, “but what can happen is that people borrow too much and end up struggling with the debt in the long term because they have no room in the budget to cover unexpected expenses.”

Gowling said the use of HELOCs continues to reinforce the mounting strain on many households in Ontario, as evidenced by the latest data from the Office

of the Superintendent of Bankruptcy, which showed the number of Ontarians who filed for insolvency in the second quarter jumped 13.5 per cent year over year, a larger jump than in all other provinces, except for Newfoundland. The Financial Consumer Agency of Canada (FCAC), which promotes financial education, says HELOCs are the largest contributor to nonmortgage consumer debt in Canada, more than double that of either credit cards or auto loans.

It says about three million Canadians hold a HELOC with an average balance of $70,000, with about one quarter carrying at least $150,000. It says 40 per cent don’t make regular payments on those loans and 25 per cent make only minimum payments or pay only the interest.

FCAC data also shows that reliance on HELOCs has grown as Canadians have moved to alarming household debt levels. Their use skyrocketed 500 per cent from $35 billion to $186 billion between 2000 and 2010. The growth rate then slowed to 5per cent per year between 2011 and 2013 and has averaged 2 per cent per year over the past several years, with outstanding HELOC balances reaching $211 billion in 2016.

The use of the credit lines to consolidate other debts at a lower interest rate in order to boost household cash flow increased substantially thanks to what the agency calls “readvanceable mortgages” from the big banks. Those products attach a home equity line of credit and sometimes other features, such as credit cards, to a term mortgage. HELOC balances secured by the borrower’s residential property can be held over time with payments only made on monthly interest, although balances are often rolled into mortgages that offer preferable rates, said Jason Heath, managing director of Markham-based personal financial planning firm Objective Financial Partners Inc.

HELOCs can benefit consumers through convenient access to funds and flexible repayment terms and “can be put to work paying down high interest debt,” he said. But Heath said they can also make households more vulnerable to financial catastrophe, such as a job loss, a housing market correction or interest rate rise.

“For a certain type of personality they don’t make sense,” said Heath. “It’s scary to think of how much Canadian consumer spending is being driven by real estate prices moving higher and not by true cash flow.”