Canadian banks expected to tighten home equity line of credit access as aid measures wind down
TORONTO — Canadian banks are expected to tighten access to home equity lines of credit (HELOCs) when coronavirus-linked government assistance programs end in a few months, as lenders seek to limit credit to already-stretched borrowers, industry watchers said.
Such lines of credit — which allow homeowners to borrow back equity in their properties — have seen limited drawdowns since the coronavirus outbreak sparked an economic collapse, with many struggling borrowers using the federal government’s stimulus measures and banks’ loan payment deferrals to get by.
But as lockdowns ease and businesses reopen in the fall, and federal aid and mortgage deferrals wind down, borrowers will likely try to tap home equity lines of credit, particularly if unemployment remains elevated.
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“HELOCs, in some ways, have the potential to magnify risk on banks’ balance sheets, because in times of stress, people want to draw on them,” said Ben Rabidoux, president of research firm North Cove Advisors.
“If (federal aid) runs out before we see a return to prior employment levels, we would see people draw down on HELOCs. Maybe that’s what forces the banks to rethink that exposure,” he said.
An early sign of that came when Bank of Nova Scotia stopped allowing borrowers to use HELOCs for downpayments on investment properties about two weeks ago, Rabidoux and mortgage broker Ron Butler told Reuters. The bank declined to comment.
HELOCs, in some ways, have the potential to magnify risk on banks’ balance sheets, because in times of stress, people want to draw on themBen Rabidoux, president of research firm North Cove Advisors
Home equity lines of credit are cheaper than other loans because they are secured by the home. But the requirement for only interest payments, and easy access to additional credit as borrowers build equity in their homes, raises the risk of borrowers taking on too much debt.
For banks, the position of HELOCs behind the first mortgage could leave them unable to recoup the full amount if property values decline, highlighting the risk.
Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce (CIBC) said they have not yet changed requirements.
HELOCs accounted for 17 per cent of Canada’s six biggest banks’ total mortgage books in the first quarter, so risk is limited, said James Shanahan, an analyst at Edward Jones.
Canada’s biggest banks require the mortgage and lines of credit combined to be 80 per cent or less of the value of the home, and the HELOC alone cannot exceed 65 per cent.
Martin Pelletier, portfolio manager at Wellington-Altus Private Wealth Counsel said banks could require borrowers to repay both interest and principal on HELOCs, rather than just interest as a way to limit exposure.
When borrowers have missed payments on other credit products, banks have reduced HELOC limits to the balance owed, to manage default risk, but they haven’t done so for all clients, Butler said.