While we’ve been hearing Mark Carney’s warnings about the amount of debt Canadians are taking on, when the Bank of Canada governor spoke out about it on Wednesday, he spoke of more than just the general “household debt” that we’ve heard so much about. This time, he concentrated on home equity lines of credit in Canada.
During a press conference in Ottawa on Wednesday the governor said, “Like any financial innovation, home equity lines of credit have both positives and negatives associated with them. The issue, as with any debt, is if these innovations or this access to debt is taken too far.” To back up his point, Mark Carney pointed to the fact that HELOCs in Canada have grown exponentially over the past ten years. In 2001, Canadians only had $8 billion in HELOC debt. In 2010 however, that debt level stood at $64 billion. Mr. Carney also spoke about the concerns the Office of the Superintendent of Financial Institutions had earlier this year, when they indicated that many Canadian lenders were giving out home equity loans far too easily.
So just what are Canadians using their HELOCs on? Carney also made mention of that, saying that these lines of credit are currently being used for two things by Canadians. One of those ways is to pay off higher interest loans such as personal loans and credit card debt – a very useful and wise way to use a HELOC. However, the second biggest use we have for HELOCs is for our day to day spending – not such a wise way to use them, and something that could get those doing so in deep trouble, especially once the interest rates start to rise.
Mr. Carney did also say during the press conference that he doesn’t think Canada’s household debt levels are going to be on an ever-increasing incline, without them ever going down. While he does think that we’ll start to turn around our debt situation eventually, he has no timeline for when that will be. And in fact, he predicts that our debt levels are going to climb even higher before they start to reduce at all.
“It’s hard to predict exactly when the process will come to an end,” he said.
Given that Mr. Carney’s Monetary Report Policy released on Tuesday kept the overnight lending rate at 1%, which isn’t going to discourage people from taking on more debt. However, once those interest rates rise – as they’re predicted to as early as late this year – the borrowing cost of HELOCs will also go up, as they are all based on a variable rate. Once that happens, Canadians are most likely going to stop relying on them so heavily.
