Ris­ing rates, prices fuel home eq­uity credit wor­ries

Many pay­ing off only in­ter­est: Re­port

The Recorder & Times (Brockville) - - BUSINESS - BAR­BARA SHECTER

TORONTO—Ris­ing in­ter­est rates and ef­forts by pol­i­cy­mak­ers and reg­u­la­tors to tame climb­ing res­i­den­tial real es­tate prices are prompt­ing con­cerns about the abil­ity of Cana­di­ans to man­age pop­u­lar and wide­spread home eq­uity lines of credit.

Re­search con­ducted by the Fi­nan­cial Con­sumer Agency of Canada sug­gests plans to pay off the loans, which make up a sig­nif­i­cant por­tion of non-mort­gage con­sumer debt, are op­ti­mistic.

New pub­lic opin­ion re­search con­firmed the con­sumer agency’s ear­lier find­ings, which re­vealed onequar­ter of the HE­LOC hold­ers have been pay­ing only the in­ter­est on these loans most months. That means they haven’t been pay­ing down the prin­ci­pal on this debt, which will be sub­ject to the higher ris­ing in­ter­est rates.

“We have al­ready iden­ti­fied a press­ing need for us to help Cana­di­ans re­al­ize that not us­ing HE­LOCs re­spon­si­bly can have se­ri­ous reper­cus­sions on their fi­nan­cial well-be­ing,” FCAC Com­mis­sioner Lu­cie Tedesco warned in a re­cent speech to mort­gage pro­fes­sion­als in Mon­treal.

Just over 60 per cent of those sur­veyed by the FCAC who were pay­ing only in­ter­est said they planned to pay off their lines of credit over the next five years, but Tedesco sug­gested that was “overly op­ti­mistic,” par­tic­u­larly given that the av­er­age Cana­dian HE­LOC bal­ance is $70,000.

Ja­son Mercer, a vice-pres­i­dent and se­nior an­a­lyst at Moody’s In­vestors Ser­vice, said higher debt-ser­vic­ing costs driven by ris­ing in­ter­est rates are a con­cern.

“If the con­sumer is barely mak­ing reg­u­lar pay­ments to­day, they will likely not be able to keep up with higher monthly pay­ments – un­less they pay down more of the HE­LOC,” said Mercer, who tracks mort­gage and re­lated debt for the credit-rat­ing agency.

This con­cern is sep­a­rate from more hy­po­thet­i­cal risk fac­tors around HE­LOCs, such as ris­ing un­em­ploy­ment lev­els and fall­ing house prices, he said.

The FCAC isn’t the only mar­ket watch­dog to sound the alarm on the HE­LOC, which has grown in pop­u­lar­ity amid pro­longed low in­ter­est rates and soar­ing house prices that pro­vided the eq­uity to back larger loans.

Bank of Canada Gov­er­nor Stephen Poloz in­cluded con­cerns about how Cana­di­ans were us­ing their HE­LOCs in a speech last De­cem­ber about things that keep him up at night.

Lines of credit se­cured by homes were ini­tially mar­keted by banks as way of ob­tain­ing cheap and easy ac­cess to funds to pay for home ren­o­va­tions that would help main­tain or in­crease the value of the home. But the funds are not lim­ited to home im­prove­ment, and, as the FCAC noted in a re­port last year, have be used to fund the pur­chase of de­pre­ci­at­ing as­sets, such as cars, and even spec­u­la­tive stocks.

As a re­sult of fac­tors in­clud­ing low in­ter­est rates, ris­ing hous­ing prices, and sig­nif­i­cant spend­ing on mar­ket­ing HE­LOCs, bal­ances grew to $186 bil­lion in 2010 from just $35 bil­lion 10 years ear­lier. Over the same pe­riod, these loans grew to rep­re­sent 40 per cent of non-mort­gage con­sumer debt, up from 10 per cent. At the end of 2017, that bal­ance had climbed to $230 bil­lion, ac­cord­ing to the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions.

Rob McLister, founder of mort­gage com­par­i­son web­site RateSpy. com, says pol­i­cy­mak­ers are keen to pull in the reins on HE­LOCs be­cause of con­cerns that the bor­row­ing binge could have reper­cus­sions for the broader mort­gage mar­ket.

“To the ex­tent over-bor­row­ing makes con­sumers less likely to re­pay their mort­gages in an eco­nomic shock, that adds to sys­temic risk,” he said.

There are fur­ther “sys­temic” con­cerns be­cause heav­ily in­debted house­holds tend to cut back on spend­ing in the event of an eco­nomic shock, such as the col­lapse of oil prices, which in turn re­duces de­mand for con­sumer goods, which can trig­ger in­creas­ing un­em­ploy­ment and re­duced in­vest­ment.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.