Cash-strapped Canadians using homes as ATMs to pay off bills

Overall consumer credit balances continued to grow in the second quarter – up to $1.88 trillion

Mario ToneguzziCash-strapped Canadians may be treating their homes like ATMS to pay off their bills, says a study by MNP Ltd.

In a news release on Tuesday, the largest insolvency firm in Canada said three in 10 Canadian homeowners with a home equity line of credit (HELOC) say they have used the funds borrowed to pay down other debts. 

More than a third say they have used the money to do things they otherwise wouldn’t have been able to do.

Also, about one in seven say that they regret the amount they’ve borrowed against their home and are concerned about paying off their HELOC.

Meanwhile, overall consumer credit balances continued to grow in the second quarter – up 4.3 per cent compared to the same period a year ago – bringing total outstanding consumer credit to $1.88 trillion, according to the the TransUnion Industry Insights Report.

Over the last 12 months, the number of consumers with access to credit also grew, up 1.7 per cent year on year, it said.

The latest data from the Office of Superintendent of Financial Institutions (OSFI) shows that the balance of personal loans secured by residential real estate reached $269 billion in June, said MNP.

“For a lot of people, home equity is likely their plan for savings and sometimes for retirement. A HELOC might seem like a cheap and convenient mechanism for credit, but what can happen is that they borrow too much and end up struggling with the debt in the long term because they have no plan to cover unexpected expenses,” said Grant Bazian, president of MNP.

“It seems there was a time not so long ago when paying off the mortgage was an important financial goal for households. But today the house is an ATM and the cash withdrawn is being used to pay other bills or – even worse – to fuel household spending.”

According to a recent survey conducted by Ipsos on behalf of MNP, 27 per cent of Canadian homeowners with a HELOC say they have used the funds borrowed to pay down other debts and 36 per cent say they have used the money to do things they otherwise wouldn’t have been able to do, such as home renovations. Also, 14 per cent say they have used their HELOC to fund discretionary purchases, such as a vacation or new car, and nine per cent say they have used their HELOC to invest in other real estate investments.

“There is a lot of uncertainty that comes with HELOCs so this type of debt is particularly troublesome for those who don’t have firm financial footing. It can put people on the fast track to an endless cycle of debt, especially if the borrower accumulates more debt on the credit cards after paying them off with a HELOC,” says Bazian.

“Those who are already cash-strapped and unable to meet other debt repayment obligations may think a HELOC will help them make ends meet but taking on more debt may put them at greater risk of foreclosure or insolvency.”

Citing data from the Office of the Superintendent of Bankruptcy, MNP said the number of Canadians who filed for insolvency in the second quarter of 2019 was up 7.4 per cent compared to the same quarter of last year and up 8.8 per cent over the previous quarter.

Newfoundland and Labrador (+22.4 per cent), Ontario (+13.5 per cent), New Brunswick (+11.7 per cent), Alberta (+10.6 per cent) experienced the greatest increases compared to the second quarter of last year. While British Columbia (+5.2 per cent), Manitoba (+4.1 per cent), Nova Scotia (+3.6 per cent), and Quebec (+1.2 per cent) increased moderately. Saskatchewan was the only province that experienced a decrease (-3.5 per cent).

According to TransUnion, the average non-revolving balance per consumer grew 6.2 per cent year over year to $31,400. At the same time, borrowing for revolving products (including credit cards and lines of credit) saw a slight drop, down 1.2 per cent year-over-year to $18,500.

“Buoyed by low unemployment and recent interest rate stability, consumers in Canada continue to build debt, particularly on auto and installment loans. And to date, consumers continue to do a good job of managing their debt levels, with delinquency rates stable over the past year. However, as the economy slows and risks of an economic downturn remain prevalent, it will be important for consumers to manage these higher debt levels diligently to remain current on their obligations,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada, in a news release.

Originations, the measure of new accounts opened, were strongest for the line of credit category – up 13.9 per cent year over year and with the market still adjusting to new qualifying rules for mortgages, there was a decline in mortgage originations of 8.9 per cent, said the report.

During the quarter, millennials (born 1980-1994) reached parity with baby boomers (born 1946-1964) in terms of outstanding total debt – each with slightly over $500 billion, it said, adding this trend represents a fundamental shift in generational lending, as banks and other institutions continue to adapt and evolve their business models to provide more options and more tailored customer experience for millennials and generation Z.

“At a headline level, the consumer credit market continues to grow. However, growth hasn’t been uniform, and in major categories like mortgages, we continued to see a decline in origination volumes when compared to the same period a year ago,” said Fabian. “The shift in focus toward non-revolving credit products is something we’ve seen over recent quarters. The rise of millennials, who have equaled and slightly surpassed baby boomers when looking at outstanding balances, is having a fundamental impact on the approach lenders take to how they market to and service their customers.”

Mario Toneguzzi is a Troy Media business reporter based in Calgary.

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