Home equity lines of credit (HELOCs) are an important source of consumer credit among Canadian homeowners. However, one third of HELOC loans are currently untapped, recording a zero balance in the first quarter of this year. On average, these credit balances are significantly below the maximum available borrowing limit. By region, the average home equity lines of credit balances and limits are higher in British Columbia and lower in the Atlantic region. However, the Atlantic region has the highest utilization rate in Canada.
What is a home equity line of credit?
A home equity lines of credit is a secured line of credit for which the equity in the borrower's home is the collateral. Borrowers can draw on a set amount at their discretion, similar to credit cards and other types of revolving credit. The variable interest rate on a HELOC tends to be lower than that on an unsecured loan. Additionally, the repayment schedule is highly flexible. These HELOCs are also less risky and have substantially lower delinquency rates compared to other consumer credit products.
The use of these credit lines can lead to greater persistence of indebtedness and wealth erosion as homeowners tap their home equity. Higher debt service costs could become problematic for deeply indebted households during periods of rising interest rates. This type of debt can also become more problematic during periods when house prices decline. HELOC loan limits could be reduced, or the loan could even be called (since they are demand loans).
More than three quarters of household debt is backed by real estate
Data from Equifax Canada shows that mortgage debt accounts for about 66% of all outstanding household debt. Home equity lines of credit account for 11%. As a result, more than three quarters of household debt is backed by real estate.
The average credit balance stood at approximately $65,000 in the first quarter of 2018 and the average limit was $168,000. This gives a utilization rate of 38%. If home equity credit holders were to fully use their available credit, it would account for nearly a quarter of total household debt.
In comparison, lines of credit (LOC) balances represent just over 3% of total outstanding household debt. This percentage could reach nearly 9% if lines of credit holders were to utilize their full available credit limit.
About one third of home equity lines of credit are untapped
A home equity lines of credit can provide emergency funds during unexpected life events. Being able to financially weather a storm can provide piece of mind. While these credit lines are increasing in prominence, not all consumers with a home equity lines of credit are currently carrying a balance.
In the first quarter of 2018, more than 3.1 million HELOCs were recorded and nearly 1.1 million remained untapped. This is a usage rate of 66.3% during the first quarter of 2018 (see chart 1). The Atlantic region recorded the highest usage rate (73.9%) and British Columbia had the lowest (63.2%).