The cost of living has spiraled out of control for millions of Canadians nationwide. Inflation remains elevated, interest rates have skyrocketed, and real wages have failed to keep up with the increase in prices. For many Canadians, even tapping into their HELOC (Home Equity Lines of Credit) is becoming a challenging option given the economic pressures

Despite the latest economic developments, homeowners are not treating their homes like ATMs to keep their heads above water. Or, at the very least, not at the levels seen in previous years. This could turn out to be good news if there is persistent downward pressure on home prices, which could leave them underwater until the recovery is fully realized.

According to new data from the Financial Consumer Agency of Canada (FCAC), home equity line of credit (HELOC) debt tumbled by 0.8 percent, or $1.4 billion, to $169 billion in January 2023. This represented the fourth straight monthly drop and the largest monthly decline in two years.

This is essential data because home equity lines of credit are revolving sources of funds that you can tap into whenever you wish. Of course, there are terms and conditions, such as a preset maximum limit, payment schedule, and length of the loan. While HELOCs can offer financial respite during difficult times, they can also be risky, particularly if home prices plummet or borrowing costs soar. This is why many market observers pay attention to HELOC debt.

That said, on an annualized basis, the HELOC growth rate was 2.1 percent, or $3.5 billion. At the same time, the year-over-year growth rate is slowing, and HELOC debt gains have decelerated from the nearly ten percent peak in September 2022, offering some good news in a rising-rate climate.

Are Changes Coming to HELOCs?

Some significant changes are coming to the HELOC market.

The Office of the Superintendent of Financial Institutions (OSFI) recently announced new rules that would cap borrowers’ HELOC limits and reinforce the financial system against loan defaults. Put simply, once homeowners reach a specific borrowing threshold, they cannot boost their HELOC limits.

CBC News has a summary of the new rules:

“The new regulations will kick in once a readvanceable loan exceeds 65 percent of the underlying home’s value. Currently, an owner can technically borrow up to 80 percent on such a loan, but the new rules will functionally ratchet that ceiling down to 65 percent by forcing the borrower to start paying back some of the principal if they go above that line.”

Industry experts say that this financial production was incredibly popular in the early days of the coronavirus pandemic: interest rates were at historic lows, and home prices were accelerating. Others note that financial institutions encouraged this type of borrowing to help fund home renovations, children’s tuition, or a down payment on a second residential property.

The adjustments will go into effect at the end of the year. The purpose? According to OSFI, the aim is to address “the underlying issue (of) persistent debt amongst Canadian households.” In other words, the goal is to prevent homeowners from overextending themselves.

In Debt, We Trust

Canadian households are the most indebted in the Group of Seven (G7). In May, household debt advanced to a new all-time high of $2.9 trillion, rising 0.2 percent. This is equal to more than 100 percent of the nation’s gross domestic product (GDP).

The good news is that borrowing trends are slowing as the annual growth rate slowed to four percent in May, the lowest monthly jump since January 2021.

As previously noted, Canadians are not taking on mortgage credit, like HELOCs. However, they are turning more toward personal loans.

Overall, non-mortgage consumer credit surged to nearly five percent year-over-year in May. Surprisingly, unlike our neighbours to the south, this was not driven by credit cards.

Still, according to the Canada Mortgage and Housing Corporation (CMHC), three-quarters of household debt originates from mortgages.

“Over the last year, interest rates have increased as the Bank of Canada battles inflation,” wrote Aled ab Iorwerth, the deputy chief economist at the CMHC. “Over time, these higher interest rates translate into higher mortgage payments for households when those on fixed 5-year terms renew at higher rates. Those facing the most challenges are those with variable rate mortgages who see higher interest rates immediately. Risks are reduced by policy changes introduced a few years ago that required mortgage holders to qualify for mortgages at a higher rate.”

Despite widespread concerns about growing debt, a chorus of economists are not anticipating a financial shock to the system or a full-blown economic collapse. But the real concern is sluggish economic growth, says David Macdonald, the senior economist at the Canadian Centre for Policy Alternatives (CCPA).

“The larger problem isn’t so much that everyone goes bankrupt, the larger problem is that everyone’s paying so much in interest, they don’t spend money on anything else, and you see a big impact on economic growth,” he told the Financial Post. “That’s, to my mind, the real danger.”