On Wednesday, the Bank of Canada raised its benchmark interest rate by 25 basis points for the fifth time since last summer. That has pushed it up to 1.75%, the highest it’s been since December 2008. Hours after the announcement, the Big Six banks announced that they were increasing their own prime lending rates by 25 basis points.
Despite this nearly yearlong upward march in the cost of borrowing, it seems Canadians aren’t slowing down in securing loans against their homes. As reported in Better Dwelling, filings by the Office of the Superintendent of Financial Institutions (OSFI) have revealed that the balance of loans secured by real estate hit a new high in August.
“The outstanding balance hit $290.98 billion in August, up $1.29 billion from the month before,” Better Dwelling noted. “The annual pace of growth reached 4.42%, nearly two points higher than it was last month.”
Teasing apart the OSFI figures, the balance of business loans secured by residential real estate has fallen. While the outstanding balance of such loans has risen to $28.92 billion, the annual pace of growth is 8.43% lower compared to the same time last year.
The picture is more concerning on the side of personal loans secured with real estate, which reached an all-time high of $262.05 billion in August — an increase of $1.2 billion from the month before. The annual pace of personal-loan growth was 6.06%, practically the same rate that was observed at the same point in 2017.
It’s unclear just how many borrowers understand what they’re getting into. In a report focused on home equity lines of credit (HELOC) released last year, the Financial Consumer Agency of Canada (FCAC) noted that lenders were increasingly offering customers readvancible mortgages, which combine term mortgages with HELOCs and other credit products.
“When used responsibly, the HELOC portion of readvanceable mortgages can provide many benefits to consumers such as low interest rates, convenient access to funds and flexible repayment terms,” the FCAC said. “However, it also allows consumers to make interest-only payments which can result in homeowners carrying debt for longer periods … [and] can encourage consumers to add to their debt load.”
But another report last year from the Ontario Securities Commission (OSC), which looked at the behaviour of investors aged 45 and older, suggests that some Canadians may be doubling down on a bad bet. It found 37% of homeowners were counting on rising home values to afford their retirement; among those between 45 and 54 years old, 45% said they need their homes to fund their retirement. What’s more, those with larger mortgages said they relied more on rising home values to finance their sunset years.
Whether they’re knowingly getting drunk on HELOCs or getting their financial plans spiked with risky property-secured loans, chartered accountant Doug Hoyes believes that Canadians should reconsider their dependence on that kind of debt.
“We've been using our houses as ATM machines … As a result, we've been able to continue to consume beyond our means,”Hoyes told CBC News. “That is not going to continue forever if house prices get under any kind of pressure. So we can't continue to live like that forever.”
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