Are Canadians using HELOCs as a financial crutch?

Survey sheds light on how homeowners use the credit mechanism — potentially to their detriment

Are Canadians using HELOCs as a financial crutch?

Figures from a federal agency and a new survey suggest that Canadians are setting themselves up for debt by improperly tapping their home equity.

Filings from the Office of the Superintendent of Financial Institutions (OSFI) showed that as of last December, personal loans secured by homes amounted to $247.63 billion, which marked a 7.05% decline from the previous month and a 1.02% reduction from a year before. But according to the latest OSFI data, the balance of personal loans secured by homes has gone up once more, reaching $269 billion in June.

Grant Bazian, president of insolvency firm MNP LTD, expressed concern at the trend of Canadians ramping up borrowing against their homes despite a slowdown in certain real estate markets in Canada.

“For a lot of people, home equity is likely their plan for savings and sometimes for retirement,” he said in a statement. “A HELOC might seem like a cheap and convenient mechanism for credit, but what can happen is that they borrow too much and end up struggling with the debt in the long term because they have no plan to cover unexpected expenses.”

A recent Ipsos survey of Canadians with HELOCs done on behalf of MNP LTD bears that out. It found that 27% sat they have used the funds borrowed to pay down other debts, while 36% said they have used the money to fund activities that they would otherwise would have been unable to do, such as home renovations. Another 14% said they have used their HELOC to pay for discretionary purchases like vacations or new cars, while 9% said they have tapped it to finance other real estate investments.

“It seems there was a time not so long ago when paying off the mortgage was an important financial goal for households. But today the house is an ATM and the cash withdrawn is being used to pay other bills or - even worse - to fuel household spending,” Bazian commented.

Though they are just one of several options for those who need cash, HELOCs have proven popular among home-rich Canadians as real estate market prices surged. But Bazian noted that they come with a lot of uncertainty, making them troublesome for people without firm financial footing. Around 14% of Canadians with a HELOC said they regret how much they’ve borrowed against their home, and the same proportion (14%) expressed concerns about paying off their HELOC.

“Those who are already cash-strapped and unable to meet other debt repayment obligations may think a HELOC will help them make ends meet but taking on more debt may put them at greater risk of foreclosure or insolvency,” Bazian stressed.

According to the latest official figures from the Office of the Superintendent of Bankruptcy (OSB), the number of Canadians who filed for insolvency in the second quarter of 2019 was up 7.4% year-on-year and up 8.8% quarter-on-quarter.


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