HELOCs now rank only behind mortgages as the largest source of debt for Canadian households. Should brokers be concerned?
Robert Mogensen- Mortgage consultant- The Mortgage Advantage Financial Services
“Canadians’ addiction to the HELOC has become very pervasive over my career as a broker. Clients have requested these with the best intentions, assuming the line of credit will be there when they need it on a rainy day when the proverbial leaking roof occurs.
In practice, though, these lines of credit have become like cash in the bank for spending on unnecessary items such as vacations, new furniture and other toys. This has led to many HELOC users never paying them down and carrying a balance that we ultimately end up refinancing into a new mortgage years later – not the intended consequence.”
Clinton Wilkins- Senior mortgage advisor- Centum Home Lenders
“Generally speaking, a HELOC is the wrong product for most borrowers. HELOCs are convenient and are offered at much lower rates than credit cards or traditional lines of credit. The issue is that interest rates for HELOCs are often 1% to 2% higher than mortgage debt, and most consumers don’t understand the product.
When used properly, HELOCs can offer much lower rates to cover short-term needs. Unfortunately, many Canadians use these for long-term debt and end up making interest-only payments, leaving consumers with a larger interest bill and far less equity in their homes.”
Elan Weintraub- Mortgage broker/co-founder- Mortgage Outlet
“There are two reasons I’m not concerned about high HELOC balances. First, the debt-to-income ratio is more interesting than absolute debt, and incomes are under-reported. In the gig economy, consumers rent/Airbnb their basement, drive Uber, earn cash, and bonuses/part-time income are under-reported.
Second, I would articulate the American dream as owning a huge house, sports cars and more. In contrast, the Canadian dream is being mortgage-free. Our attitude is different. Some Canadians overborrow, but more focus on pay-down. Plus, we smartly borrow to purchase assets – like adding a basement apartment – rather than buying toys.”
