Home Equity Lines of Credit: Market Trends and Consumer ...

Home Equity Lines of Credit:

Market Trends and Consumer Issues

Public Research Report

June 2017

Cat. No.: FC5-52/2017E-PDF

ISBN: 978-0-660-08671-2

? Her Majesty the Queen in Right of Canada, as represented by the Financial Consumer Agency of Canada, 2017

Ce document est aussi disponible en fran?ais sous le titre Les marges de cr¨¦dit hypoth¨¦caires : tendances du march¨¦ et questions touchant les consommateurs.

Table of contents

1. Purpose .........................................................................................................................................................................................................

1

2. Background ...............................................................................................................................................................................................

Moderate growth: 2011¨Ctoday ..................................................................................................................................................

1

1

2

2

3

3

Product evolution: the emergence of readvanceable mortgages .................................................................

4

3. Product characteristics ...................................................................................................................................................................

3.1. Flexibility ........................................................................................................................................................................................

5

5

3.2. Open terms ....................................................................................................................................................................................

5

3.3. Affordability .................................................................................................................................................................................

5

3.4. Complexity ....................................................................................................................................................................................

Figure 4: How readvanceable mortgages work .............................................................................................................................................

6

6

4. Consumer issues ...................................................................................................................................................................................

4.1. Over-borrowing .........................................................................................................................................................................

7

7

4.2. Debt persistence .......................................................................................................................................................................

7

4.3. Wealth erosion ...........................................................................................................................................................................

8

4.4. Uninformed decision-making ........................................................................................................................................

8

Figure 1: Examples of readvanceable mortgage products ....................................................................................................................

Rapid expansion: 2000¨C2010 ......................................................................................................................................................

Figure 2: HELOC uses 1999-2010 ..............................................................................................................................................................................

Figure 3: HELOCs and household debt .................................................................................................................................................................

5. Macroeconomic risks ........................................................................................................................................................................ 10

5.1. Increased vulnerability to an economic shock ................................................................................................. 10

5.2. Payment shock ........................................................................................................................................................................... 10

5.3. Housing market correction .............................................................................................................................................. 11

5.4. The role of HELOCs in the U.S. financial crisis .................................................................................................... 12

6. Improving consumer protection and education ...................................................................................................... 13

6.1. Education ........................................................................................................................................................................................ 13

6.2. Disclosure ....................................................................................................................................................................................... 13

7. Summary ..................................................................................................................................................................................................... 15

1. Purpose

The Financial Consumer Agency of Canada (FCAC) recently conducted research on home equity lines of

credit (HELOCs) to better understand the consumer issues, potential macroeconomic risks, market trends

and lenders¡¯ business practices. FCAC has a legislative mandate to conduct research on market trends and

issues with the potential to impact financial consumers. This report focuses on the market conduct of

federally regulated lenders and on the risks posed to consumers by HELOCs. It summarizes the Agency¡¯s

research findings, and explains how FCAC plans to respond to the risks identified.

2. Background

HELOCs are revolving, and typically non-amortized, credit products secured by a lien on the borrower¡¯s

residential property.1 The HELOC product first appeared in the late 1970s, but it was during the mid-1990s

that lenders began tailoring HELOCs to appeal to a broader cross-section of consumers. Today, most HELOCs

are sold as a component of readvanceable mortgages. Readvanceable mortgages combine HELOCs with

amortized mortgages, and in some cases other credit products and banking services (e.g., personal loans,

business loans, chequing accounts, overdraft protection and credit cards) under a global credit limit secured

by a collateral charge against the borrower¡¯s property.

Figure 1: Examples of readvanceable mortgage products

Bank of Montreal

Homeowner ReadiLine

Bank of Nova Scotia

Scotia Total Equity Plan (STEP)

Canadian Imperial Bank of Commerce

CIBC Home Power Plan

Manulife Bank

Manulife One Mortgage

National Bank of Canada

All-in-One Account

Royal Bank of Canada

RBC Homeline Plan

Toronto-Dominion Bank

TD Home Equity FlexLine

1 The large majority of HELOCs in Canada have indefinite terms. For a more detailed discussion, see DBRS. (November 2014). Rating Canadian residential

mortgages, home equity lines of credit and reverse mortgages. [Methodology Report]. Toronto. [Retrieved online]

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