A lot of rumours are hitting banking circles regarding the amount of equity Canadians have in their home. Now we finally have a data point courtesy of Mortgage Professionals Canada, the national mortgage broker industry association. According to a report from their Chief Economist William Dunning, 1.91 million Canadians have a Home Equity Line of Credit (HELOC).
HE-What?
For those that don’t know, a HELOC is when a homeowner borrows against the equity in their house. It’s kind of like taking out a second mortgage. Since home equity is usually the largest asset most people have, it’s often only reserved for extreme purchases like home improvements, and medical bills. Rising home prices, low interest rates, and abuse of HELOCs are often cited as the perfect storm that caused the US housing crash in 2008. Canada has rising home prices, and low interest rates – and now everyone is keeping an eye out for HELOC abuse, which might be the straw that breaks that camel’s back. So you can see why the number of Canadians using HELOCs is important to the real estate market.
Equity Ratios For Canadian Homeowners
Probably not a huge surprise considering we just crossed the $2 trillion debt mark, but there’s quite a bit of outstanding mortgage debt. The report estimates that 21% of Canadians that purchased their home before 1990, still haven’t paid it off after more than 27 years. Conversely, 22% of Canadians that purchased a home between 2014 – 2016 have already paid off their home. 1% of Canadians that purchased homes between 2014-2016 have negative equity in their property. Yikes.
Home Equity For Purchases Made
2014 – 2016
Source: Mortgage Pros Canada.
So how does all of this debt look in Canada’s 9.86 million homes? 4.38 million homes have a mortgage, and 3.57 million homes have neither a mortgage or HELOC. Not all that interesting, but what is interesting is the number of people cashing in on the equity in their home. 500,000 Canadians have a HELOC, and another 1.48 million households have a HELOC and a mortgage.
Home Equity and Outstanding Debt
Source: Mortgage Pros Canada.
Still Room To Borrow From HELOCS
Not exactly great that people are borrowing against their home equity, but it could be worse. 23% of HELOC holders haven’t accessed the funds yet, and only 7% have fully utilized the approved amount. The average HELOC approved is currently $168,000, but the average amount owed is only $67,000 (40%). It’s mildly encouraging that most holders haven’t needed to tap the extra funds they’ve been approved for yet.
What Are Canadians Using HELOCs For?
Canadians use their HELOCs in different ways, not always because they’re strapped for cash. 28% borrowed for debt consolidation, which makes sense when borrowing rates are this low. Another 22% used the borrowed money for investments, which sounds good unless they’re “investing” in another house. 31% needed the money for a renovation or repair, and 9% for general purchasing. 9% of borrowers mysteriously use it for “other.”
Are Canadians “abusing” their HELOCs? It’s not exactly clear from this report, but there is room for things to get worse. So there’s that.
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