- Banks closely monitor household debt levels and economic growth to ensure that Canadian households and consumers can manage their debt.
- Banks lend to clients who demonstrate the willingness and ability to repay their loans.
- The vast majority of Canadians are responsible borrowers who use credit wisely to strengthen their financial futures.
The bottom line
Banks are prudent lenders, manage risk carefully and make sure borrowers are properly qualified and can withstand economic fluctuations.
How HELOCS work
A Home Equity Line of Credit (HELOC) is a type of credit, secured by a residential property.1 With a HELOC, homeowners withdraw funds from their home equity to pay for items such as a home renovation or a child’s education.
A HELOC is a secured line of credit with the homeowner’s property acting as the security for the loan. As a result, lenders are able to offer lower interest rates on a HELOC than they can for unsecured credit lines, such as a credit card.
A HELOC allows its user to withdraw an amount of credit up to a credit limit established by the lender at the time the HELOC is taken out. Regulations in Canada stipulate that a HELOC cannot exceed 65% of the value of a borrower’s residential property. This credit is revolving, meaning that when the borrower withdraws funds, the amount of remaining credit decreases, and when funds are paid back, the amount of remaining credit increases, up to the maximum credit limit.
To qualify for a HELOC, borrowers need to have:
- at least 20 per cent home equity,
- an acceptable debt-servicing capacity;
- proof of a steady income;
- an acceptable credit score; and
- proof of home ownership.
Lenders will also require proof of the value of the borrower’s residential property, such as a formal property appraisal.
Banks are prudent HELOC lenders that manage risk carefully
Banks are prudent lenders that manage risk carefully, only lending to those who they believe can pay the money back. The qualifying criteria for a HELOC are more stringent than for a mortgage. Before a bank will grant a HELOC to a customer, they will complete a thorough due diligence process including factors such as:
- the borrowers credit history, assets and financial obligations;
- employment and income details;
- information from appraisers and MLS listings confirming that the property, which is offered as security, is appropriately valued; and,
- whether the information being provided is legitimate.
Once a bank approves a HELOC, it will continue to monitor the borrower’s credit quality because of the revolving nature of the loan, and will generally require regular, minimum payments – much like a credit card.
Canadians are prudent borrowers who manage their debts well
According to a report released by Mortgage Professionals Canada in 2016, one-fifth of Canadian homeowners have a HELOC. Of those that do, 23 per cent currently owe nothing on their HELOC, while only seven per cent of HELOC holders have fully utilized the amount available to them.2
Canadians are also managing their debts well. HELOC portfolios at the banks have stabilized in terms of growth. At the end of January 2017, total HELOCs outstanding at the big six banks stood at $197 billion, with annual growth rates averaging just over one per cent since 2013.
The report found that, of those who took equity out of their home (through either a HELOC or mortgage refinancing), many used it to increase their net worth:3
- 31 per cent of the funds were used for renovation or home repair.
- 22 per cent of the funds were for investments.
- nine per cent of the funds were used for purchases (including spending for education).
1 HELOCs are sometimes combined with a mortgage, allowing the borrower to access up to 80% of the value of their home. While these combined products are sometimes called “HELOCs”, they are essentially a combination of a non-amortized HELOC (capped at 65% of the home’s value) and an amortized mortgage loan (for the portion above 65% and up to 80% of the home’s value).
2 Mortgage Professionals Canada, Annual State of the Residential Mortgage Market in Canada 2016 https://mortgageproscan.ca/en/page/industry-and-consumer-reports