The growth of the HELOC (Home Equity Line of Credit) in Canada has been well documented. Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20%. Today that number sits at over $260B. This growth has become a blessing and a curse for Canadian households. While it has helped spur house prices and simultaneously provided consumers the ability to tap into their new found equity, it has also crippled many Canadian households into a debt trap that seems insurmountable. Canadian household debt has ballooned to 100% of GDP, the highest of the G7 countries.
Amidst a rising interest rate environment and a weakening housing market, this growth has prompted the concerns of Canadas financial regulators. OSFI, which already implemented a mortgage stress test earlier this year, is now rumoured to be taking a stab at the HELOC space. Earlier this week, Canada’s No. 1 player in HELOCs, TD Bank, just changed a key policy on Tuesday.
For people applying for a separate new mortgage and keeping their existing HELOC, TD is requiring that applicants now prove they can afford a theoretical monthly payment based on the limit – not the outstanding balance – of that HELOC.
For example, assume you have a HELOC with a $200,000 limit. Today, most lenders will make you prove you can afford the payment on the money you owe on that HELOC. If your HELOC has a zero balance, it was of little consequence to your mortgage application.
However, under the new policy the lender wants you to prove you can afford a payment based on your HELOC credit limit. Even though you might have a zero balance, the bank assumes you might use all of your available credit. Assuming you had a HELOC credit limit of $200,000 this would apply a $1,202 theoretical payment to the borrower’s mortgage application. This results in a 51% TDS ratio, pushing you above the allowed maximum.
As a result, this will curb the growth of HELOC’s moving forward. This will indeed have significant implications across the Canadian credit landscape which just recently witnessed consumer credit growth slow to a 35 year low.
Unfortunately for regulators, the horse has already left the barn. According to CMHC, roughly 3.1 million Canadians have HELOCs, with the average credit balance in the first quarter of the year sitting at just under $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. In BC, Canada’s most expensive housing market, that number sits at $78,203 with the average tapped HELOC having inflated to $123,797.
The further tightening of HELOC debt will do more than just choke off credit growth. It could also slow the private lending space which has been a benefactor of homeowners tapping home equity lines in order to fund the growth of private lenders. This could also impact first time buyers, whom, from 2015-2018 sourced $4 of every $10 of their downpayment from the Bank of Mom & Dad, according to Will Dunning of Mortgage Professionals Canada.
Fortunately for many would-be borrowers, very few lenders have applied this policy – yet. But three of Canada’s big banks have already moved in that direction and it’s expected all major banks will follow suit by next year.
Rob Mclister, the founder of Rate Spy summarized the changes suggesting, “Without a doubt, this could incrementally depress the cottage, second-home and rental markets. We’re not talking a market crash, here, but every credit-policy tightening adds up and weighs on home prices.”