About one in three home equity lines of credit (HELOC) are untapped in Canada and balances are significantly below the maximum available borrowing limit, according to a report released on Tuesday by Canada Mortgage and Housing Corp.
CMHC said more than three-quarters of household debt is backed by real estate. It cited data from Equifax Canada showing that mortgage debt accounts for about 66 per cent of all outstanding household debt with HELOCs accounting for 11 per cent.
“The average HELOC balance stood at approximately $65,000 in the first quarter of 2018, while the average limit was $168,000. This gives a utilization rate of 38 per cent. If HELOC holders were to fully use their available credit, HELOC debt would then account for nearly a quarter of total household debt,” said the CMHC report.
“In comparison, line of credit (LOC) balances represent just over three per cent of total outstanding household debt. This percentage could reach nearly nine per cent if LOC holders were to utilize their full available credit limit.”
A HELOC is a secured line of credit for which the equity in the borrower’s home is the collateral. Like with credit cards, or other types of revolving credit, HELOC borrowers can draw on a set amount at their discretion. The variable interest rate on a HELOC tends to be lower than that on an unsecured loan. Additionally, the repayment schedule is highly flexible, explained the CMHC.
“The use of HELOCs, however, can lead to greater persistence of indebtedness and wealth erosion as homeowners tap the equity in their homes. During periods of rising interest rates, higher debt service costs could become problematic for deeply indebted households. This type of debt can also become more problematic during periods when house prices decline. HELOC loan limits could be reduced, or the loan could even be called (since they are demand loans),” said the CMHC.
Of the more than 3.1 million HELOC loans recorded, nearly 1.1 million remained untapped, for a usage rate of 66.3 per cent during the first quarter of 2018, said the report. The Atlantic region recorded the highest usage rate (73.9 per cent), while British Columbia had the lowest (63.2 per cent).
While the average HELOC balance is $65,000, if only those with a non-zero balance are considered then the average jumps to $97,000, said the report. Those in B.C. have the largest average HELOC debt at $124,000.
Mario Toneguzzi is a veteran Calgary-based journalist who worked for 35 years for the Calgary Herald, including 12 years as a senior business writer.