The national lust for home equity lines of credit: should we worry?
Low interest rates. High credit limits. Lines of credit can turn your home into an ATM
Murad Ali and Arsheen Haji live large thanks to easy access to their home equity lines of credit, joining the many Canadians succumbing to the same temptation.
For the Toronto-area couple, it all started back in 2009 with a lavish $78,000 wedding.
After the birth of their daughter, the couple moved into a newly built home and spent more than $100,000 on upgrades, including a custom kitchen, hardwood floors and a high-tech fireplace.
The wedding, trips and high-end purchases were made possible with cash from two home equity lines of credit secured against a couple of investment condos the family owns. The debt from those loans now totals $370,000. They also recently got an unsecured $30,000 line of credit to buy solar panels for their new house.
Line of credit addiction
It's like turning your house into an ATM- David Trahair, chartered accountant
"We are addicted for sure. Who wouldn't be addicted to something so easy [to get]?" says 35-year-old Ali about the free-flowing lines of credit that have enabled him to splurge on the finer things in life.
"It's easy, accessible cash at a very cheap price. The banks make it so easy for you to obtain it," says the software engineer.
The couple is part of a national trend. Canadians love their lines of credit, which feature interest rates that are much lower than credit cards. Ali pays just 3.25 per cent interest on his home equity lines. Credit card rates typically hover around 20 per cent.
According to an RBC report last week, Canadians' outstanding debt on personal lines of credit hit $266 billion as of April, a 3.2 per cent gain over last year.
It should be noted that the rate of growth is slowing and sits well below historical highs. But one thing's certain. The total debt keeps mounting.
Home equity credit lines allow Canadians to borrow big – up to 80 per cent of a property's value when combined with a mortgage. According to the Canadian Association of Accredited Mortgage Professionals, 22 per cent of homeowners had a home equity line of credit in 2014. They owed an average of $57,000.
"It's like turning your house into an ATM," says chartered accountant David Trahair, who has written numerous books on personal finance. "If you've got a house, especially in Toronto with these insane values, you can borrow an incredible amount of money against the house."
Will it ever end?
Trahair worries that with potentially high credit limits, those lacking self-control can easily get in over their heads. "For spenders, the low interest rate environment is almost like a drug. It's almost impossible for them not to take advantage of these low interest rates and borrow."
But the Canadian Bankers Association is not worried. It states that Canadians are responsible borrowers and that banks are prudent lenders. Before granting a home equity line of credit, "banks complete a thorough due diligence process," said spokeswoman Kate Payne in an email.
Ali is now considering borrowing more money against the equity in his new home. He admits he's antsy about adding to his debt when the family already has a substantial mortgage on their 5,000-square-foot house.
But the place is still largely unfurnished and he's yearning to install a $40,000 glass railing for the staircase.
"Without the glass railing, the look of my stairs is not doing it justice," he says.
Right now, the couple could probably afford the extra loan payment. Currently, both he and Haji, a business analyst, can cover the bills and still have money left over for savings.
BMO senior economist Benjamin Reitzes notes that current low interest rates mean high debt levels aren't bankrupting Canadians.
Proceed with caution
But the big question is what happens if rates go up or the economy takes a tumble. "If we were to get a big increase in the jobless rate or a big increase in interest rates, then there might be a little bit of trouble but, for now, neither of those two things are forecast," says Reitzes.
Trahair is less sanguine about the situation. He says any unexpected event, from an illness to a decline in the housing market, could wreak havoc for a highly indebted family. He calls the lust for lines of credit "a ballooning debt bubble that eventually is probably going to burst."
While Ali and Haji like to spend, they believe they're behaving responsibly and say they're aware of potential pitfalls. That's why they're still undecided about another loan.
"If you get a line on this [house] and God forbid something happens to me or [my wife] and we are unable to sustain our lifestyle or stream of income that we have, then we would be in trouble and that may lead to us losing this house," says Ali.
And that's why some rooms in the family's home remain empty. Ali shows CBC News his large, mostly barren master bedroom and talks about his grand plans to furnish it — sometime in the future.
"Without the credit line, it's slow," he laments.
But things could always change. The couple says just last week the bank called, inquiring if the family was interested in another loan.