Full credit to the banks for resourcefulness in selling Canadians on ways to rack up more debt.
The latest debt numbers from the credit-monitoring firm TransUnion Canada suggest developments in real estate lending have slowed the market for home equity lines of credit, or HELOCs. The TransUnion numbers suggest banks have responded with a successful push on unsecured lines of credit, with much higher interest rates.
TransUnion said the number of new credit lines of all types jumped 15.6 per cent on a year-over-year basis in the first quarter of this year, a turnaround from a recent trend of low growth. “Lines of credit have been pretty stagnant,” said Matt Fabian, director of financial services research and consulting at TransUnion Canada. “They’ve been running around 1-per-cent year-over-year growth in origination volume.”
The recent surge was based on a 20-per-cent increase in unsecured credit-line sign-ups and a 10-per-cent decline in HELOCs, which have been affected by tighter mortgage lending rules. HELOCs allow you to borrow at a low rate because the loan is secured by equity in your home. An unsecured credit line, with no asset to secure the loan, is riskier for lenders and thus costs more.
Mr. Fabian said demand for unsecured credit lines may be driven to some extent by people seeking a way to pay for renovations on their home. With high prices in many cities and tougher mortgage lending rules, it’s more cost-effective in some cases to renovate a home rather than move to something bigger. But it’s highly unlikely that demand for unsecured credit lines jumped like it did in the first quarter on pure consumer demand as opposed to bank marketing.
Actual borrowing costs for credit lines depend on your credit history and your bank’s willingness to deal. Expect something like a premium of three to five percentage points or more over a bank’s prime lending rate for unsecured credit lines, compared with prime plus 0.5 to one percentage point for HELOCs.
Increased marketing of unsecured credit lines comes at a time when Canadians may finally be coming to their senses about debt. In a recent column, I looked at how a lot of money appears to been allocated to debt repayment instead of investments in mutual funds and exchange-traded funds during registered retirement savings plan season this year.
TransUnion found that the average balance per borrower for lines of credit was $35,634 in the first three months of the year, down 0.2 per cent. The delinquency rate – late on payments – was down 0.02 per cent to a low 1.06 per cent.
Mr. Fabian said banks typically market credit lines to their more financially stable clients, which suggests the pool of people signing up for credit lines is less at risk than the broader population of getting in too deep. But concerns about HELOCs in particular have been raised by the federal Financial Consumer Agency of Canada.
Unsecured credit lines don’t offer as much borrowing room typically as HELOCs, and they don’t present the risk of having a big debt secured by real estate that is falling in value. But the higher borrowing cost of unsecured credit lines can’t be ignored, particularly if interest rates get back to the rising trend that was interrupted late last year.
Used properly, both HELOCs and unsecured credit lines can be smart ways to finance a purchase. One rule to follow is a maximum repayment period of two years or so. There’s nothing particularly significant about two years – it just gives you a hard deadline for getting rid of the debt and not making minimum payments that keep your debt alive. Another rule is to curb the impulse to use a line of credit like an ATM. You need radical changes to your finances if you must dip into your line of credit to pay regular expenses. Sell a car, maybe, or drop a big expense.
TransUnion said over all growth in borrowing came in at 4.2 per cent in the first quarter, a slower rate than the 5-per-cent to 6-per-cent trend of the past couple of years. A big driver of growth during the quarter was installment loans, which have a fixed term and payment every month and sometimes a fixed rate as well (credit lines have a variable rate, no fixed term and only a minimum required payment). Growth in these loans may to some extent reflect the rise of new non-bank lenders in the world of “fintech,” or financial technology. Rates can be high on these loans, so this is something to watch.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, May 22, 2019