Personal debt problems usually follow a simple, familiar pattern: People putting wants before needs and people spending imprudently – often recklessly – on those wants through easy borrowing. Today in Canada, a convenient and increasingly popular way for free-spenders to borrow big is through home equity lines of credit (HELOCs), which comprise low-cost loans of up to 80 per cent of a home’s collateral value.
Some demonize all such loans. But I think it’s unfair to characterize HELOCs as bad in and of themselves. Amongst smart, cautious folks, the loans can be put to use in ways that add value to life without creating debt problems. Amongst spendthrifts, though, HELOCs can lead to financial ill health through foolhardy outlays based on unchecked access to piles of borrowed cash.
In our consumer-mad society, there are signs that a growing number of people are content to treat their homes as if they were gigantic ATMs.
Let’s call it a bad case of the HELOCs, an ailment that can be diagnosed through various forms of overspending. Consider the second family car (a snazzy sportster no less) for hubby’s use as he turns 40 and tries to contend with male menopause. Or think about the dream kitchen that never quite satisfies wife’s vision despite numerous renovations. Then there’s the lavish wedding for daughter that pushes mom and dad’s hopes for a happy retirement lifestyle to an ever more remote point on the horizon.
I can go on about how the HELOCs’ spending malady can spread – the fun and games, the bars, the dining out, the clothes, the toys, the gadgets, what have you. Truth is, in our consumer-mad society, there are signs that a growing number of people are content to treat their homes as if they were gigantic ATMs ready to be tapped on a whim. And to think, just a generation ago most all Canadians viewed their homes as sacrosanct investments worth owning outright as soon as possible – and worth protecting at all costs.
Consumers have leaped at the opportunity to secure low-cost loans that provide almost limitless credit in a rising housing market.
Times are changing. This spring the Globe and Mail reported that “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. 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.
“Crucially, (HELOCs) 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 … 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,” the Globe said.
Resisting the allure of these loans is not easy for many consumers, who seek quick material gratification in accordance with our highly acquisitive culture.
I humbly add that among the concerned consumer advocates the Globe referred to are yours truly and Ontario bankruptcy trustee Doug Hoyes, a smart friend and ally to my agency Credit Canada Debt Solutions. The Globe asked Doug and I to weigh in on HELOCs and we offered some opinions. Not least among them was the view that resisting the allure of these loans is not easy for a good number of today’s consumers, who seek quick material gratification in accordance with our highly acquisitive culture.
“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,” Doug said. I noted that the lines of credit can easily run into hundreds of thousands of dollars, making it hard to hit a debt wall when at last one’s overspending hits home like a wrecking ball.
Some need reminding that the cash we free up through HELOCs is not our money but the lender’s money. We’ve given up the space of our homes for it.
Fortunately, tapping big cash through HELOCs presents no huge waning asset crisis in Canada as of the moment. Survey data for 2014 from the Canadian Association of Accredited Mortgage Professionals (CAAMP) shows that 27 per cent of people with mortgages had home equity credit lines, with the average homeowner using up 42 per cent of total borrowing capacity. Only nine per cent in this group had reached their borrowing limit.
So Canadians are not yet scrambling en masse to leverage home equity. Still, the trend is clear, and restraint here is the operative word in my view. Perhaps some of us need reminding that the cash we free up through HELOCs is not really our money but the lender’s money. We’ve given up the space of our homes for it. If we experience debt problems because of the loans, it may be only because we’ve been playing games of self-delusion.
Homeowners – and all of us as Canadians – should remember that satisfying gratuitous wants for today can seriously affect vital needs for tomorrow.
Importantly, we should understand that, as Doug Hoyes points out, “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 … 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.”
In the end, as I say, it all comes down to wants versus needs. Homeowners – and all of us as Canadians – should remember that satisfying gratuitous wants for today can seriously affect vital needs for tomorrow. You might say the thinking amounts to an antidote against any HELOCs’ bug.