Home reno? Debt consolidation? Tapping your home equity is getting harder

Canadians aren't cutting down on borrowing, though — or even on using lines of credit. Instead, they're borrowing through unsecured lines of credit. GettyImages

For many Canadians, home-equity lines of credit have long been the borrowing tool of choice for home renovations and debt consolidation — and it’s easy to see why. HELOCs typically come with low interest rates, flexible repayments and very high credit limits.

But the love affair between homeowners and their HELOCs seems to have hit a rough patch, according to a new report by credit monitoring firm TransUnion. The volume of new HELOC accounts was down 10 per cent was during the first three months of this year compared to the same period in 2018. The drop was a reversal from previous quarters, which had seen growth, the agency said.

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In part, that likely reflects the fact that fewer Canadians are buying homes and getting mortgages amid a cooling housing market, said Matt Fabian, director of research and industry analysis for TransUnion Canada. Mortgage originations dipped 1.3 per cent nationwide in the last three months of 2018 (the last period for which data is available) and dropped almost 20 per cent in British Columbia amid falling home prices in Vancouver and new market-cooling provincial regulations.

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The volume of new HELOCs and that of new mortgages usually move in tandem, Fabian said.

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But the main driver is likely the tougher federal mortgage rules, which set a higher bar for consumers to qualify for both mortgages and HELOCs at the big banks, he added. And while the regulations aren’t binding for provincially-regulated financial institutions like credit unions, these, too, are increasingly adopting the higher lending standards on a voluntary basis, Fabian added.

Canadians, though, aren’t cutting down on borrowing — or even on using lines of credit. Instead, they’re borrowing through unsecured lines of credit, which aren’t backed by a borrower’s home, the data suggests.

The volume of new ULOCs was up over 15 per cent over the same period, the report shows.

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Fabian has a hypothesis about what might be happening. Imagine a family who was hoping to move from a four-bedroom to a five-bedroom home but no longer qualifies for a mortgage big enough to afford that purchases, he said, due to both the stricter borrowing rules and higher interest rates, which make it more costly to borrow. That family is now likely to stay put for a year or two and save up for a larger down payment while they wait to see how things shake out in the market.

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In the meantime, though, they want to renovate their current home to make a little more space, Fabian added. Even if they don’t qualify for a large HELOC, they may still be able to borrow enough through a ULOC.

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Those hoping to consolidate their debts may also be increasingly using ULOCs rather than HELOCs, Fabian said.

This may also be, in part, because the banks, faced with declining business from mortgages and HELOCs, may be pushing ULOCs, Fabian said.

Canadians tend to open lines of credit at the bank where they already do most of their business, which means lenders usually have a wealth of data about borrowers’ behaviours and their history of borrowing and repaying debt, he noted.

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“They can kind of focus and really target the consumers that they want with the right pricing and the right limits,” he said.

The problem with that, though, is that ULOCs are typically a costlier way to borrow than HELOCs. Current interest rates on lines of credit backed by home equity generally range from 3.95 per cent to 4.95 per cent. On unsecured lines, that may be between 5.95 per cent and 8.95 per cent for Canadians with good credit scores, according to financial planner Jason Heath.

Worse, ULOCs — just like HELOCs — have variable rates that could increase with another interest rate hike by the Bank of Canada (BoC).

In addition, borrowers should know that lenders can generally reduce credit limits, increase the interest rate at their discretion even without a BoC move, or even demand that the loan be repaid at any time, Heath noted.

“A line of credit can be a good temporary emergency fund, but if your line of credit balance keeps rising, you cannot keep spending more than you earn sustainably,” he said via e-mail.

Heath worries that the increase in unsecured credit is a sign that some borrowers are running out of options.

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“If someone is getting behind financially, they will probably tap all available resources, like unsecured lines of credit, credit cards, etc. before they actual start to go delinquent,” he said.

Delinquencies remain low for now, he said. But “a recession or weak real estate prices — or a combination — could be the straw that breaks the camel’s back,” he added.

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