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Feeling The Hell In 'HELOC'

Apr. 10, 2018 11:20 AM ETEWC, QCAN, IFNA, FCAN, HEWC, FLCA11 Comments
Danielle Park, CFA profile picture
Danielle Park, CFA

Last night at our community gym the local radio station blared recurring ads for 'easy refinancing' and 'easy home loans'. 'Take that trip… redo that kitchen… consolidate those debts… help the kids!' The jingles were relentless and the message clear: "Why wait until you have the money, to spend it on those things you always wanted!"

This reminded me of how over the past decade, Canadian banks have increasingly recommended that customers agree to a collateral charge on their homes when they apply for a mortgage. Lenders like TD Bank (TD) have even been encouraging people to register collateral loan limits that are 125% of a home's current market value (typical sales team genius).

Unlike a standard charge with defined payments of principle and interest, for a fixed term, that reduce the debt towards zero over time, most collateral charges are re-advanceable. As principle re-payments are made and/or property values increase, the room to borrow magically grows larger by the week. In other words, collateral charges offer the potential for never-ending debt obligations. Great for lender profits - at least until the write-offs inevitably follow; but worse for the borrowers - nearly always.

Then there was the Globe and Mail feature last Saturday Home truths: Easy equity is trapping us in record debt that profiled real life Canadian families and the never-healing-debt-wounds that plague them as they stretch for unaffordable homes and lifestyle with self-destructive amounts of credit. Now they are feeling the hell in collateral mortgages or 'HELOCs' (home equity lines of credit). Here are a few stats:

In 2017 alone, customers of Canada's six largest banks borrowed $14.4-billion more on their HELOCs than they repaid, pushing such borrowing to a record $207-billion as of Oct. 31 - up 7.5 per cent from a year earlier, according to a Globe and Mail analysis of the banks' financial reports…

This article was written by

Danielle Park, CFA profile picture
Portfolio Manager, financial analyst, attorney, finance author, a regular guest on North American media. Danielle Park is the author of the best selling myth-busting book “Juggling Dynamite: An insider’s wisdom on money management, markets and wealth that lasts,” as well as a popular daily financial blog:www.jugglingdynamite.com Danielle worked as an attorney until 1997 when she was recruited to work for an international securities firm. A Chartered Financial Analyst (CFA), she now helps to manage millions for some of Canada's wealthiest families as a Portfolio Manager and analyst at the independent investment counsel firm she co-founded Venable Park Investment Counsel Inc. www.venablepark.com. For two decades, Danielle has been writing, speaking and educating industry professionals and investors on the risks and realities of investment behaviors. A member of the internationally recognized CFA Institute, Toronto Society of Financial Analysts, and the Law Society of Upper Canada. Danielle is also an avid health and fitness buff.

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