This week’s news that Canadian households have fallen deeper in debt than any other G7 country is setting off alarm bells.
the amount we owe has surpassed Canada’s entire growth domestic product .But that’s not the half of it. Three quarters of Canadian household debt is tied to mortgages; either directly or through home equity loans.
The posted five-year fixed reverse mortgage rate from Home Equity Bank, the primary provider of reverse mortgages in Canada, has hit an astonishing 7.5 per cent compared with 4.5 per cent for conventional mortgages. As the name implies, reverse mortgages are similar to conventional mortgages — but instead of payments flowing into the home, they flow out. That means instead of the principal falling over time, the principal rises over time.A home equity line of credit allows homeowners to borrow against the equity in their homes at will by simply transferring cash when they need it.
Home equity could be further eroded if rates continue to rise and/or the value of the property falls.The concern from the CMHC and other government and finance industry interests only go as far as the “systemic risk”, or risk to the entire financial system in the event of mass default. They actually benefit from higher debt levels as long as borrowers have the ability to service it through regular payments.
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