If anything has rubbed the stink off carrying debt, it’s the home equity line of credit.
A new report on the use of home equity lines of credit, known as HELOCs, was published this week by the Canada Mortgage and Housing Corp. The Crown corporation suggests that while the use of HELOCs (pronounced hee-locks) has not reached epidemic levels on a national basis, there are signs these borrowing tools have become a financial crutch for many people.
A quick HELOC refresher: They’re power tools meant for occasional, short-term use. If you’re running a perma-balance on your HELOC, it’s a sign you need to recalibrate your spending.
The CMHC says there were more than 3.1 million HELOCs in the first three months of 2018, nearly 1.1 million of them unused at that time. This means the national usage rate for HELOCs was 66.3 per cent on a national basis.
The average credit balance in the first quarter of the year was about $65,000 when all HELOCs are lumped in together, including those with and without balances. Among HELOCs with a balance owing, the average debt was $97,000. Both numbers are well short of the average borrowing limit on HELOCs, which was $168,000.
HELOC use closely tracks what’s happening in regional housing markets. The CMHC’s data show that British Columbia, with the country’s most expensive housing market, is the leader in average HELOC balances at $78,203 on average. Atlantic Canada, our cheapest housing market, had an average balance of $50,093.
People in the business of lending money will undoubtedly say these numbers show people are using HELOCs responsibly and this is somewhat true. Usage of HELOCs is not at heart-attack levels.
But it’s also clear that after close to a decade of low interest rates, we’ve lost our inhibitions about debt in general and HELOCs in particular. Have you been dragging a HELOC debt behind you for a while now? Welcome to the club.
Because your home is used as security, HELOCs are typically cheaper than other forms of borrowing. That’s why HELOCs are the smart borrower’s go-to way to cover off surprise expenses that can’t be covered with the typical emergency fund, or for short-term financing of big expenditures. My wife and I have a HELOC that we’ve used to finance a couple of projects around the house over 12 to 18 months.
Properly used, a HELOC is like a light switch in your basement. Sometimes it’s on, but mostly it’s off. Today, a lot of HELOCs have no off-switch. As noted above, two of every three HELOCs were being used in the first quarter of the year, with an average balance of $97,000. That’s huge, by the way. It’s more than enough to pay for tuition and books for a couple of your kids taking four-year university undergrad degrees.
The CMHC’s report warns of several risks associated with HELOCs:
-They can lead to a more persistent form of indebtedness: You generally have to pay only the interest owing on a HELOC every month – principal repayment is open-ended.
-They can erode your wealth: Remember, you’re drawing down on your home equity.
-They will increase your debt burden as interest rates rise: This has already happened in the past year.
-They can be problematic when house prices fall: The CMHC says HELOC loan limits could be reduced by a lender or the loan could be called.
The biggest problem with HELOCs right now is the way they’re becoming a support for people whose income won’t give them the lifestyle they want. Some HELOC debt is used productively to generate money for investing in assets that have a good chance of generating a return that beats the cost of borrowing. But the high average debt on HELOCs suggests the cliché about them is accurate – some people are using them as if they’re an ATM.
Banks began pushing HELOCs in the mid-1990s and it took a while for people to get comfortable with the idea of having one. The next milestone, now reached, was getting comfortable with running a big balance on a HELOC. What next? Maxxing out your HELOC?