It’s one of the biggest questions hanging over Canada’s record household debt
One of the biggest questions hanging over Canada’s record household debt is just how much borrowers owe against their homes.
Helocs can add to debt burdens because they don’t typically have a fixed repayment schedule. If home prices fall, borrowers can find themselves with more debt than their properties are worth, the dreaded “negative equity” scenario that played a significant role in the U.S. housing crash a decade ago. The issue has come into focus as Canada’s ratio of debt to disposable income reached a record 174 per cent in the fourth quarter.
Hybrids ExpandingGrowth in stand-alone Helocs has been flat, while all of the banks are seeing strong growth in the hybrid product, which is relatively less risky because it’s partly amortizing, according to Himanshu Bakshi, credit research analyst at Bloomberg Intelligence in New York. However, these hybrid Helocs are more complex than traditional ones, he said.Canada’s six biggest banks reported $223 billion of outstanding, or drawn, Helocs as of Jan. 31.
• Royal Bank of Canada reported $39.6 billion of non-amortizing Helocs. A spokeswoman said the bank’s amortizing home equity product is classified as a mortgage. The bank said in a filing that ‘home equity lines of credit include term loans collateralized by residential mortgages. • Bank of Montreal reports similarly to Toronto-Dominion. A spokesman said 55 per cent, or $17.4 billion of its $31.7 billion in Helocs was amortizing, while the rest, $14.3 billion, was non-amortizing.
However, some lenders put that figure much lower. Toronto-Dominion said less than 14 per cent of its Heloc customers made interest-only payments in the past year. RBC said 7 per cent of clients for its Homeline Heloc product make only the scheduled interest payment. None of the other banks disclose that figure.
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