24 Apr

Bank Of Canada takes aim at home equity lines of credit


Posted by: Deborah Fehr

The Bank of Canada sounded the alarm on growing household debt on Wednesday, taking aim in particular at the growing tendency of Canadians to take out lines of credit using home equity.

While the Bank has repeatedly warned on household debt levels in the past, on Wednesday it provided more detail about the type of debt Canadians are taking on, including its concerns about the rapid growth of so-called HELOC’s (home equity lines of credit).

The issue, as with any debt, is if these innovations or this access to debt is taken too far

“Like any financial innovation, home equity lines of credit have both positives and negatives associated with them,” Bank of Governor Mark Carney said during a press conference in Ottawa. “The issue, as with any debt, is if these innovations or this access to debt is taken too far.”

He pointed to the concerns raised by the country’s banking regulator, the Office of the Superintendent of Financial Institutions, which said earlier this year that some lenders were too lenient in providing home equity loans.

Mr. Carney’s comments build upon the release of the Bank of Canada’s Monetary Policy Report on Wednesday, a quarterly economic overview compiled by the central bank. The report highlights the explosive growth of HELOC’s and mortgage refinancings in the past decade, which have surged to $64-billion as of 2010 from $8-billion in 2001.

Canadians appear to be using such loans for two primary reasons, the Bank said. They are either paying down other higher interest loans, such as credit card debt, or using the money for everyday spending.





13 Apr

Report Blames Non-Mortgage Debt for Consumer Woes


Posted by: Deborah Fehr

A new report from Equifax is pointing a finger in the same direction as brokers, arguing non-mortgage debt as the real threat to consumer solvency.

“It is not surprising to see consumer credit continue to increase given the significantly improved levels of consumer delinquencies and bankruptcies witnessed in the last year, coupled with record-low consumer borrowing rates,” said Nadim Abdo, VP of consulting and Analysis for the credit bureau.

While Credit card debt continued its fall during the first quarter of 2012, decreasing by 2.1 per cent from the same period last year, The Equifax Report reveals total consumer indebtedness — excluding mortgage debt – actually increased by 3.4 per cent compared to the time last year.

New loans opened in Q1 2012 were nearly 1 per cent higher than they were a year earlier. And the largest increase in outstanding balances was in auto finance loans and lease agreements, which grew by 10 per cent over the Q1 period for 2011.

Those highlights back up the concerns of mortgage professionals calling on banking regulators to shift their focus away from tightening mortgage lending rules and toward strengthening the underwriting on unsecured debt.

The argument may be loss on the Office of the Superintendent of Financial Services as it prepares to bring in a slew of new, more rigid guidelines for banks and other mortgage providers.

Of immediate concern to brokers is its intention to increase the equity requirements for homeowners seeking HELOC – something that could remove that option for Canadians in desperate need of debt consolidation.

“This guideline change (moving the equity minimum from 20 per cent to 35 per cent) would create an artificial crisis by removing the recourse some homeowners now have to consolidating unsecured, high-interest debt into secured, low-interest debt,” said Ad Lakhanpal, an Oakville-based broker with Mortgage Alliance. “Lenders are already asking borrowers questions about what they intend to use HELOC funds for to ensure it’s not being abused.”

The comments jive with those of other brokers reacting to proposed guideline changes now being floated by the Office of the Superintendent of Financial Services. The watchdog wants to lower the maximum loan-to-value of uninsured home equity lines of credit to 65 percent from 80 percent.

“The federal government already instituted tougher guidelines for qualifying for HELOCs and lenders already use stricter lending guidelines, including net worth tests, property valuation tests, and credit scoring to ensure that HELOC borrowers are the best of the best,” Gord McCallum, owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca.