This is part of a Globe series that explores our growing dependence on credit – from the average household to massive institutions – and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge
Consumer advocates are raising concerns about the escalating use of home equity lines of credit, warning that many people are finding it hard to resist the temptation of such a huge and easily accessible borrowing option.
For many people, home equity lines of credit have replaced credit cards as their top source of borrowing. Outstanding balances on lines of credit soared to $266-billion in March, 2015, from $100-billion in 2005 and just $35-billion in 2000, according to Statistics Canada.
Crucially, they have also climbed as a proportion of all personal loans outstanding – now accounting for 59 per cent of Canadians' non-mortgage personal debt, up from just 30 per cent in 2000.
Canada's banks have quietly made a seismic shift in their lending over the past 15 years, turning to home equity lines of credit as their largest non-mortgage consumer lending product. The credit lines are appealing to lenders because they allow banks to make fully secured loans against people's homes that require little allocation of bank capital as backing.
And consumers have leaped at the opportunity to secure low-cost loans that provide almost limitless credit in a rising housing market. Many financial institutions allow money to be instantly transferred from a credit line into a bank account where it can be spent on anything a consumer chooses.
"When you're going through the grocery line at the store, do you buy that magazine by the cash? It's there, it's an impulse buy. The line of credit thing is the same thing – it's there," says bankruptcy trustee Doug Hoyes.
Mr. Hoyes, of Kitchener, Ont.-based Hoyes Michalos & Associates, has studied insolvency trends in Ontario. "The easier it is to get credit, the more you get," he says. "And that drives up insolvency rates."
The growth has been fuelled by the increase in house prices over the past 15 years, but it has also been spurred by lending tactics, with banks pushing lines of credit as an add-on to many new mortgages. In some cases, banks offer them automatically to mortgage customers who haven't requested them.
Major banks offer home equity lines of up to 80 per cent of the equity in a home, and some borrowing limits expand automatically with each mortgage payment, creating a ballooning source of potential credit.
Laurie Campbell, CEO of Credit Canada Debt Solutions Inc., which provides counselling to people with debt problems, says home equity lines of credit allow many people to borrow far more money than they used to be able to with credit cards or other loan options. Many banks require customers to pay only the interest on their credit lines, so the principal can grow rapidly over time.
With house prices so high, lines of credit can easily run into hundreds of thousands of dollars, making it hard to hit a debt wall. But that doesn't mean everyone is making wise choices about how to use the debt, Ms. Campbell said. She said she was pushed to take a line of credit when she moved her investments to a new financial institution, but turned it down.
"I was kind of made to feel like I was really missing out by saying no," she said.
Data suggest most people who get home equity lines of credit use them.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) said survey data show 27 per cent of people with mortgages in Canada in 2014 also had home equity credit lines, and 90 per cent of the lines had an outstanding balance.
The average homeowner had used up 42 per cent of total borrowing capacity under the home equity lines of credit, CAAMP said in a November report on residential mortgage trends, with an average debt outstanding of $57,000.
The report also showed 9 per cent of people had used their entire borrowing limit. With an estimated 2.15 million home equity lines of credit outstanding in Canada, 9 per cent translates into about 190,000 households fully tapping their maximum available lines of credit.
The question, however, is whether banks should ease up on automatically doling out expanding lines of credit if only a minority of people are using them aggressively.
The Bank of Canada has given indications it is growing less concerned about the borrowing trend.
A 2012 Bank of Canada study on debt growth said personal lines of credit have grown at a much faster rate since the mid-1990s than other sources of consumer borrowing, and said banks have helped to spur the demand by strongly marketing their lines of credit since the mid-1990s and by increasing the range of home equity line products to appeal to a larger segment of the population.
"Financial innovation and increases in house prices have probably been significant factors underlying the increase in total consumer credit," the report said.
In 2012, Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) took steps to rein in growth of home equity lines, introducing a rule capping borrowing limits for home equity lines of credit to 65 per cent of the value of equity in a house. (The amount can rise beyond 65 per cent but the extra portion must be amortized, which means there must be principal repayments.)
Since then, home equity lines have grown more slowly, and the Bank of Canada said in a report last December that it believes credit lines have declined as a proportion of consumer loans because of the OSFI rules and continuing low interest rates.
But financial services industry consultant David McVay said he isn't sure the OSFI rule change was the main factor in slowing the growth because most forms of consumer borrowing have also slowed in the past three years.
The major debt category that has grown significantly is mortgages, he says, which suggests many people are buying houses while interest rates are low, and some may not have very much equity yet to back large home equity lines of credit.
The fact most people are drawing down less than the maximum available from their credit lines also suggests the maximum OSFI limits aren't constraining borrowing for most people. But it means borrowing could increase again more quickly if demand changes.
Mr. McVay believes home equity lines are a wise borrowing option, targeted at exactly the sort of person who can most manage the debt – home owners with significant equity in their properties.
"There are certainly a group of customers who are not able to control their borrowing behaviour, but the vast majority who have been able to build up substantial equity in their homes have the financial discipline to be able to use them properly," he said.
Jim Murphy, chief executive officer of CAAMP, which represents mortgage brokers and others working in the mortgage sector, said most Canadians have ample equity in their homes and can afford to use their lines of credit for renovations or to consolidate other higher-cost debt.
"I think it's a good product. I think it provides other options for Canadians in terms of accessing money for different situations," he said.
But Mr. Hoyes worries that many homeowners could be in trouble if interest rates rise. If they have to pay more interest on their variable-rate lines of credit at the same time that payments rise on their variable-rate mortgages, they could face a double whammy of growing payment costs that could create a major problem.
He said many people don't understand that if they're paying only interest on their lines of credit – with no principal repayments – their payments would climb by 50 per cent if interest rates move from just 2 per cent to 3 per cent.
"How many people out there can handle a 50-per-cent increase in your expenses? None. That's where we're really vulnerable."