The use of Canada’s benchmark rate in administering the mortgage stress test is currently under review, according to an official with the Office of the Superintendent of Financial Institutions (OSFI).
Canadian Mortgage Trends – Steve Huebl·
Over the past 15 years, home equity lines of credit have emerged as the driver of mounting non-mortgage debt in Canada — yet many Canadians don’t understand what they’ve signed up for and are not moving to pay them off, a new survey suggests.
The more than three million Canadians holding a HELOC owed an average amount of $65,000, the study released Tuesday by the Financial Consumer Agency of Canada (FCAC) found. About one quarter of HELOC holders had a balance of more than $150,000.
Yet 25 per cent of respondents said they only made the interest payments month to month.
Ipsos conducted the online survey of 4,800 Canadians, most of them homeowners, from June 5-28, 2018, on behalf FCAC, a federal agency that promotes financial education.
HELOCs are revolving credit products secured against the equity in a home. Banks can lend up to 65 per cent of the value of a home. Such lines of credit have been easy to get and banks offer them as a default credit option to anyone with home equity.
Of the homeowners surveyed, 54 per cent had a mortgage and 35 per cent had a HELOC.
“You can’t deny the fact that for the consumer it is a cheap source of credit. However, you have to use it well,” said Michael Toope, communications strategist for FCAC.
The problem is that people borrow more than they intended and end up struggling with the debt, he said.
The survey suggested there is a lack of understanding among consumers of how these lines of credit work.
Only half of respondents knew basic facts about the terms of HELOCs, such as:
Interest rates began climbing in 2017 and 2018 and are likely to rise further this year. That affects the interest cost of these loans and the overall cost of paying them off. Your HELOC is more expensive than a mortgage as the interest rate is higher.
“Each bank sets its own prime rate based on the Bank of Canada rate and HELOCs are usually set at prime plus a premium, but the bank can change that premium at their discretion,” Toope said.
Almost two-thirds of respondents said they used their HELOC only or mostly as intended, as a revolving line of credit.
Yet for some, HELOCs are a risky product that eats away at their ability to build wealth, Toope said.
The equity they build in their home as they pay off a mortgage is a way for Canadians to build wealth over time, but that won’t happen if they have a debt secured by the house.
“In the end, you’re losing the long-term value of the mortgage you have in your home,” Toope said.
In a 2017 report, FCAC found home equity lines of credit may be putting some Canadians at risk of over-borrowing.
That report found most consumers do not repay their HELOC in full until they sell their home.
About 19 per cent of respondents to the new survey said they’d borrowed more than they intended.
And 18 per cent said they did not know the full balance on their HELOC.
Among those who paid only the interest on the debt, the majority were young Canadians, aged 25 to 34. That’s not unusual, as people at that stage of life tend to have lower incomes and may be burdened with student debt as well as a mortgage, but it still indicates a lack of understanding, Toope said.
The survey found 62 per cent of those who paid only the interest expected to repay their HELOC in full within five years, a plan Toope called a “mathematical impossibility.”
Half of Canadians borrowed against their HELOCs for renovations, but another 22 per cent dipped into it for debt consolidation, with vehicle purchases and daily expenses also common uses, according to the survey.
“People should know what they are going to use it for and how to pay it down, so it doesn’t become an eternal revolving debt,” Toope said.
Source: CBC.ca – · CBC News ·
Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.
It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.
Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?
But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”
It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.
“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.
“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”
There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.
Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.
Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”
One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.
For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.
Mr. Robinson cites several good ways to borrow to invest.
“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.
Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.
“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”
What could possibly go wrong? A few big things, the experts say.
For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.
“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.
Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.
Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”
Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.
High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.
A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.
“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.
Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.
“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”
Source; SPECIAL TO THE GLOBE AND MAIL
Those with mortgages will feel the hike the most
The Bank of Canada is hiking its benchmark interest rate by a quarter point to one per cent. So, what does that mean for people with credit card debt or a mortgage?
Economist Bryan Yu with Central 1 Credit Union says if you’re carrying a lot of debt on your credit card, you’ll probably start to notice higher interest charges.
“They’re going to be facing the quarter-point increase on terms of that debt for their servicing… That’s a quarter point on an annual basis. So, it is going to be a bit of a pinch going forward.”
“Likely, we are going to see a couple more hikes going forward,” he speculates. “But I think at this point, it will be relatively stable for most individuals until about next year.”
So, it might be a good time to start chipping away at that balance.
“They should keep in mind that this is sort of the early stages of a longer-term rate cycle. So, they may want to be looking at paring back some of that debt over time,” says Yu.
“When it comes to credit card debt, it’s a normally high cost debt, unlike mortgages, which is relatively cheap money. So you don’t really want to be holding on to that type of a debt going forward because of the high cost associated with it. So, if you are looking at paying off any debts whatsoever, it should be those high-cost loans.”
For those with a mortgage, Economist Tsur Somerville with UBC explains who’ll feel this rate hike the most:
“If you have an adjustable rate mortgage, then your mortgage payments will be going up very, very soon. And if you’re on a fixed rate mortgage, it means that when you renew, you’re going to be looking at higher payments then.”
Somerville says while the Bank of Canada hiking its trendsetting rate won’t alone make a huge impact, it’s part of a process that is increasing the cost to borrowers, which could dampen the real estate market.
“You start seeing increases in what people will have to pay on their mortgages. That affects pricing and affects demand.”
He adds first-time buyers will be most affected. “Those are the people who are entering mortgages; they’re not carrying an existing mortgage. So, we would expect those to be the people who all of a sudden are looking at qualifying for a smaller mortgage and having higher payments on a mortgage than the existing amount.”
This is the second time this year that the Bank of Canada has moved the benchmark higher.
“I think if we get a third and fourth hike, I think that a kind of accumulated pattern that starts to have an effect on people,” says Somerville. “Any one-off effect, the amount and payment is relatively small and you can sort of brush it all off. But when they start piling up, [it starts] making a difference.”
Source: MoneySense.ca – Martin MacMahon and Denise Wong, News 1130
A federal agency is warning consumers addicted to home equity lines of credit — a product increasingly driving debt — could find themselves at increased risk of default if the housing market corrects.
“Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending, which could in turn negatively affect the economy,” the Financial Consumer Agency of Canada wrote in a 15-page report out Wednesday. “Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”
The timing of the release from FCAC is coincidental but it comes just two days after the Toronto Real Estate Board reported new data that clearly show the housing market in retreat. May sales dropped 20.3 per cent from a year ago and prices were off 6.2 per cent from April amid a massive surge of active listings.
The report, titled Home Equity Lines of Credit: Market Trends and Consumer Issues, focuses on the massive explosion of the HELOC market which grew from about $35 billion in 2000 to $186 billion by 2010 for an average annual growth rate of 20 per cent.
During that period, HELOC became the fastest growing segment of non-mortgage consumer debt. In 2000, the HELOC market made up just 10 per cent of non-mortgage consumer debt but had climbed to 40 per cent by 2010.
“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households. HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford,” said Lucie Tedesco, commissioner of the FCAC. “Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock.”
The average annual growth of the HELOC market slowed to five per cent from 2011 to 2013 and has averaged two per cent since, the slowdown at least partially attributable to tougher federal guidelines on how much home equity consumers can access through a HELOC.
HELOC products have become popular because they work like credit cards or unsecured lines of credit, in terms of the ability to draw money from them. They are usually backed by a collateral charge on your home but a HELOC most often gives the consumer the ability to withdraw and pay off their HELOC with flexibility — financed at a rate which is usually close to the prime lending rate at most banks.
Unlike a mortgage, a HELOC is a demand loan, and while most borrowers can pay interest-only on them, the loans are callable by the bank at any moment — a practice rarely seen in the Canadian market at this time.
A positive feature of a HELOC is the ability to consolidate high-interest debt from items like credit cards, and the report says from 1999-2010, 26 per cent of loans were used for just that. Another 34 per cent were used for financial and non-financial investment. The remaining 40 per cent was used for consumption or home renovation — a market Altus Group said was worth $71.4 billion in 2016.
The federal agency noted that most HELOC products sold today are part of what is called readvanceable mortgage. In those cases a HELOC is combined with the mortgage and as the mortgage is paid down, the available credit in HELOC increases.
“In recent years, lenders have been strongly encouraging consumers to use readvanceable mortgages to finance their new homes,” said Tedesco.
She said complaints have shown people are not understanding the product. “It’s not that they’ve been bamboozled,” said Tedesco. “One of the things that we will be doing with the results of our research is trying to see how we can improve the disclosure around readvanceable mortgages, and will communicate to the financial institutions our expectations on that front.”
Source: Financial Post – Garry Marr | June 7, 2017