Borrowing against homes increasing
LENDING Home lines of credit tempting but more risky HOUSES ARE BECOMING PIGGY BANKS.
OTTAWA• Canadians are borrowing against t heir houses at the fastest pace in more than five years, as home equity lines of credit emerge as a preferred means of accessing funds.
Balances of non-mortgage loans to individuals for nonbusiness purposes, secured by residential properties, a category that includes lines of credit, jumped 7.2 per cent in December from a year earlier, the fastest annual growth since 2012, reaching a record $ 230 billion, according to data published on the website of the Office of the Superintendent of Financial Institutions.
Borrowers can tap lines of credit for up to 65 per cent of the value of their homes, and the funds are most commonly used for making renovations, investing and consolidating debt, according to a June 2017 report by the Financial Consumer Agency of Canada.
“Houses are becoming piggy banks,” said Paul Gulberg, a Bloomberg Intelligence analyst. It’s “either greed-based or need-based.”
Home equity lines of credit can also be a red flag for policy-makers.
It’s a type of borrowing that may contribute to increased household vulnerabilities because it typically doesn’t require the principal to be repaid on a fixed schedule, the Bank of Canada said in its most recent financial system review. About 40 per cent of line of credit borrowers don’t regularly pay down the principal.
Of total non- mortgage loans secured to individuals for non- business purposes, those secured by residential property represent about 46 per cent, the data show.
Compared to other loan types, such as auto loans and credit cards, rates on home equity lines of credit are typically cheaper, making them more attractive. They also tend to be more sensitive to fluctuations in borrowing costs, because they’re usually tied to prime rates.
“It’s a rising risk factor because it’s something that reprices more rapidly than a typical mortgage pool,” said Gulberg, adding the risk is rising “in conjunction with the fact that it’s fuelling overall consumer credit, which is considered to be an issue.”
Canadians have about 3 million home equity line of credit accounts and the average outstanding balance is $ 70,000, the FCAC said, which also warned borrowers are increasingly vulnerable to rising interest rates and a housing market correction.