Canadian Homeowners Are Pulling Back On HELOC Borrowing

Canadians are finally getting shy about spending their recent home equity windfall. Regulatory filings show the outstanding balance of home equity line of credit (HELOC) fell in January. It wasn’t just HELOC, but all home equity borrowing showed a substantial monthly contraction. Falling home values and rising interest costs might have finally tempered the spending of paper gains. However, this slowdown is relatively minor in contrast to debt acquired in recent years. 

Canadian HELOC Debt Fell $1.4 Billion In A Month

Canadian HELOC debt has pulled back as those rising rates slow borrowing. The outstanding balance fell 0.8% (-$1.4 billion) to $169.0 billion in January. It was the largest monthly pullback in two years, and marked the fourth consecutive monthly decline. The balance is back to April 2022 levels. 

The brief surge that appeared last year looks to be cooling fast. The annual growth rate fell to 2.1% (+$3.5 billion) in January. Growth for HELOC borrowing appears to have peaked in August 2022 this cycle, and it was a very brief period of growth. 

Home Equity Loans In General Have Begun To Contract

Looking at the numbers above, it looks like HELOC loans haven’t been a significant concern at all. That’s a little contrary to the warnings we’ve heard about home equity loans, which have even come from some regulators. That’s because there’s now a very rigid definition of HELOC, that excludes other types of home equity loans.  

Home equity borrowers with fixed repayment terms, or combined with their mortgage, aren’t included. Many people that think they have a HELOC, don’t have one—they have a home equity loan. Once you include all home equity debt, the picture changes in many ways. 

Including all outstanding personal loans backed by home equity, nearly doubles the balance. The balance shoots up to $307.1 billion for January, about 88% more than just HELOC debt. This segment still fell 0.7% (-$2.3 billion) in the month, sending the balance to the lowest level since August 2022. Anytime a single month is able to wipe out a half-year of growth, it’s worth paying a little attention to. 

Canadian Debt Secured By Home Equity

Canadian household debt secured by residential real estate equity.

Source: OSFI; Better Dwelling.

Outside of the month, the annual growth rate for home equity loans has been robust. January’s outstanding balance was 7.3% ($20.8 billion) larger than 12-months before. It’s decelerated from the 9.9% peak observed in September, but not exactly low growth. It’s inline with mortgage credit, which is unusually high for an advanced economy. 

Canadian Debt Secured By Home Equity Growth

The annual growth of household debt secured by residential real estate equity. 

Source: OSFI; Better Dwelling.

Home equity borrowing has slowed but only after a significant surge in borrowing. Loan surges tend to accompany rapid price growth, as borrowers spend their paper gains. Isolating HELOC data downplays the outstanding liability created by the rush to cash in. 

Generally, it might seem like good news to see highly indebted households pay some debt down. However, the primary issue is this credit growth has been driving economic growth. As this credit is paid back, the tailwind it provided disappears, potentially adding another drag to the country’s economy.