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Home Equity Loans Account for Most Canadian Household Debt

\"\"Are home equity loans accounting for most of the increases in household debt? Bank of Canada warns that Canadians may be taking on more HEL debt than they can handle.

A study of borrowing trends has confirmed that loans secured by the equity in homes are adding to the outstanding debt, and not home mortgages, as is commonly believed.

The country\’s homeowners have been increasingly converting home equity to cash to pay for renovations and purchase of consumer goods. Latest reports from Statistics Canada reveal that average household debt has increased to 153 per cent from 110 per cent back in 1999, and 70 per cent of this is mortgage debt.

As home prices have scaled higher, debt-to-household equity has also risen. Bank of Canada says that a correction in home prices may affect Canadians. With the upswing in home prices, households are having to take out bigger home mortgages to fund their house purchases, and using the equity from rising home values to pay for their other purchases.

Should home prices reverse, values will drop while Canadians will still be saddled with significantly large mortgages, increasing debt-related stress. According to Statistics Canada, an economic downturn that leads to home price depreciation, can take a turn for the worse as consumer spending plummets.

An important reason for spending to drop is that home equity may fade away, diminishing the borrowing ability of homeowners. It is estimated that a price drop of 10 per cent can lead to a one per cent dip in consumption.

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