Homes are expensive, and the vast majority of consumers don’t have the means to purchase real estate in cash. That’s where mortgages come in. Arrangements such as home equity lines of credit (HELOCs) and extended amortizations add additional financing options. The question is: are Canadians stretching themselves too thin?
Extended amortizations (or 30-year terms) are not a new concept; Canadians with uninsured mortgages or those who put down at least 20 per cent of their purchase price can currently take advantage of them. While 30-year terms have been prohibited since 2012 for insured mortgages or for those putting down less than 20 per cent of their purchase price, the October 21 federal election results could change that: at least two parties have vowed to either bring back – or consider bringing back – extended amortizations.
HELOCs, a form of secured credit whereby lenders guarantee your repayment by securing the loan against your home, are another option many Canadians are utilizing – approximately 2 million Canadians between 2014 and 2017 to be exact. (Compare this stat to the 380,000 Canadians who instead refinanced to extract their equity.) The borrowed funds were nearly evenly split between renovations, large items such as furnishings and vehicles, debt, and investments.
Housing costs appear to have a direct impact on consumers’ use of extended amortizations and HELOCs: longer-term mortgages enable home buyers to purchase a home that may otherwise not be in their reach, and HELOC use tends to trend up with rising house prices. In 2017, when housing prices rose by 13 per cent nationally, household spending increased by 3.5 per cent. A year later, when housing prices were stagnant or plummeted, consumers spent less and shied away from drawing on their HELOCs.
Increased consumer spending has a positive effect on the economy: when home prices increased between 2014 and 2017, the gross domestic product rose accordingly by 0.5 per cent. But having access to borrowed money has the potential to wreak havoc on personal finances. According to Equifax, total consumer debt increased by 1.9 per cent last quarter, following a 2.6 per cent increase the quarter before, prompting concerns Canadians may exceed prudent spending limits if rates are slashed. In the long term, such spending habits could have an adverse effect on debt service capabilities and plans for retirement.
These products are not bad mortgage choices, however being aware of their function is very important. As DLC mortgage brokers we have access to many different mortgages and line of credit options and are more than happy to go over an and all options available to you and your family.
Before deciding on the length of your mortgage term or use of a HELOC, you should talk to an advisor. We’re always more than happy to help! Contact us today.