They’re a popular tool most often used to fund home renovations, especially in recent years, but Canadians may be cooling to borrowing via home equity lines of credit (HELOC).
“HELOC loans fell month-on-month for the first time since May 2016 as they remain on a slowing trajectory following strong increases through 2017 and 2018,” write Scotiabank’s Alena Bystrova, a research analyst, and Juan Manuel Herrera, an economist, in a recent report.
In a follow-up email, Herrera tells Livabl, “The most recent slowdown would suggest that fewer Canadians are opening HELOCs and/or those who have a line of credit on their home have chosen to hold back on borrowing against their property.”
He adds the bank does not have data on the total number of HELOCs accounts open nationally.
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Herrera suggests the Canadian housing market slowdown that came after years of strong price growth might have dampened HELOC demand.
“HELOC loans may have declined as homeowners who consider spending on renovations in their homes have a reduced incentive to do so now that home prices have seen practically no increase nationwide since late-2018… Any additional money spent on a home would not provide the financial returns that it could have resulted in two years ago,” he says.
“The Bank of Canada’s rate-hiking cycle through 2017-18 also led to an increase in consumer interest rates, which acts as a deterrent for people taking out additional loans,” Herrera continues.
Rapidly rising home prices could have encouraged more Canadians to take on HELOCs as they tried to get top dollar for their homes.
In part a result of the decline, household credit growth slowed to a month-over-month rate of 4.4 percent, shy of April’s 4.9-percent gain despite mortgage growth tracking at an impressive 6.3 percent.
That’s the biggest monthly increase since November 2018, when homebuyers were rushing to purchase properties before stress testing for uninsured mortgages took effect the following January.
Scotiabank researchers note that HELOCs are still a small piece of the consumer-credit pie, which also includes mortgages and other loans.
“Despite the rapid acceleration of HELOC borrowing since early-2016, these loans have gathered ‘only’ an additional 2.4 ppts (percentage points) share of total consumer credit with chartered banks over the last three years,” write Bystrova and Herrera.
Just 14 percent of Canadian households have a HELOC.
Roughly half of all HELOCs in 2018 went towards financing renovations, and the next most common use is debt consolidation, which accounts for a 22-percent share. Day-to-day expenses and vehicle purchases represent a 19-percent share of HELOCs.
Earlier this year as key Canadian housing markets corrected, a prominent credit-rating agency noted the risk these loans can present during downturns.
“In the event of a correction, borrowers could find themselves with a debt load that exceeds the value of their home, which is often referred to as negative equity,” writes Robert Colangelo, senior vice president, global financial institutions group, at DBRS.