Scott Terrio plays the role of financial firefighter — he saves families from the burning buildings of a financial crisis; he talks down the guy holding a gas can.
As manager of consumer insolvency at Hoyes, Michalos & Associates, prolific tweeter, and a national columnist for two major outlets, Terrio’s spent the past couple of years warning the public about Home Equity Lines Of Credit, or HELOCs. They essentially allow Canadians to borrow against their house — with better rates, and no fixed schedule for repayment.
HELOCs feel like easy money — pay it back whenever you can, no rush — but Canadians are getting greedy with them. Terrio fears a “bloodletting” is coming.
A few facts to consider: Canadians’ HELOC debt has climbed to record levels, and this growth hasn’t slowed down, even with rising interest rates. It’s getting more expensive to borrow, but we can’t seem to stop.
Terrio chatted with Toronto Storeys in December about renter vs. homeowner debt, why millennials can’t live like boomers, how HELOCs were able to catch fire, and what he expects in 2019.
How have you come to be so familiar with — and vocal about — HELOCs?
I started to do some writing in Macleans and Money Sense about some of the things I see in my work.
One of the things that became more common in the last few years was people using their Home Equity Lines Of Credit to maintain certain lifestyles, or just because it was sold to them. And frankly, it didn’t help their situations.
Anybody who was already in a precarious financial situation probably didn’t need another $70,000 in interest. And rates are rising. HELOCs are subject to interest rate rises because it’s a line of credit.
But I think very few people really looked into the fine print of the HELOC. Frankly, not a lot of them use them for home renovations, which is sort of what they were meant to be about. And they use them for everything else — vacations, luxury pets, putting the kids in private school, whatever.
So, HELOCs have become a pet theme of mine.
How have homeowners run away with this?
One of the statistics we keep track of in the insolvency business is how much unsecured debt people have — whether they own a home or whether they rent.
Renters tend to have somewhere in the mid-$40,000s, on average, of unsecured debt — so credit cards, lines of credit, that kind of stuff. And homeowners have about $30,000 more than that.
So it’s a bit counterintuitive. But if you think about it, you’re more credit-worthy if you have a home — or you appear to be — and the banks give you more. You also have more expenses, likely.
If you throw the temptation of tapping your home equity on top of that, it’s pretty hard to turn down. People are living paycheque to paycheque, and finding themselves already house poor, and someone dangles $100,000 in front of them.
Right now, 3.1 million Canadians have HELOCs. So, 3.1 million Canadians have access to another hundred grand.
Do you think hot housing markets — and media coverage of them — feeds into this idea that a HELOC is a golden egg? Like, housing is so valuable, why not cash out a little bit while we’re still young?
I think so, big time. I think our generation also doesn’t have the same mindset as our parents. Our parents abhorred the idea of the mortgage. Their first instinct was to pay it down. Pay it down, pay it down, pay it down.
But Generation X and Y and Z has the mindset of: I’ll pay credit later, I want stuff now, so I’m willing to go into debt to get it. This is partly a consumption issue.
It’s also — we find in our business — an income issue. People’s incomes are not where they really should be to live the lifestyle that our parents had. Many factory jobs disappeared and the part-time gig economy hasn’t helped much. So, we find most people have an income issue rather than a real credit issue.
There’s this term — “need-based vs. greed based” — that gets used about HELOCs. What do you see in your practice?
I’ve seen people who’ve had zero mortgage and a $200,000 HELOC. The house is paid off — it’s the Little Italy house they grew up in and their mom and dad left it to them. All of a sudden they’re swimming in equity, like a million bucks. All of a sudden they’ve got a HELOC that has a $200,000 balance because: what the hell? why not?
They didn’t use it to renovate the house top to bottom, they used it for whatever they wanted. People are just using them to buy cars, they’re using them to buy boats. I don’t think a lot of it is need-based.
I’ve got other people who lost their job. And so for two years, they had no income, and they’ve got equity in their house. So, OK, there’s a hundred grand.
Let’s take an alarmist tone. What are some scary figures?
Something like a third of people with HELOCs pay only interest. The average balance is about $70,000.
So — of the 3.1 million Canadians that have HELOCs — only two-thirds of them are getting anywhere. Very few people have a plan for paying it back, because it’s not required.
If I gave you a $200,000 mortgage, there would be an amortization schedule and the payments would be laid out for the next quarter of a century. With a HELOC, it’s like: Here’s $200,000 — go nuts.
And how many people are financially responsible enough to handle that? In an expensive city like Toronto or Vancouver — good luck.
One of the other big issues is that, compared to the U.S., the amount of HELOC debt in Canada is something like $230 billion. And the U.S. only has like $370 billion in total HELOCs. So they have ten times as many people and they don’t even have twice as much HELOC debt.
We’re so HELOC-nuts here.
If you had a chance to guide policy, what would you do?
The problem is it’s too late. The new rules for HELOCs are that they’re not going to approve you anymore on your balance, they’re going to approve you on your limit. So, they’re stress-testing you against your maximum, as opposed to what you’ve got. They should’ve done that five years ago. The horse is out of the barn.
The Bank of Canada is just going to stop raising rates because they’re going to panic. Even though rates are stupidly low, central bank policy is political. If they think Canadians are going to freak out if they keep raising rates, they’re going to stop.
I would’ve done five years ago, what they’ve done now — the stress tests.
They let this thing go crazy with emergency low rates for eight years.
There’s a lot going on in 2019. We have rising rates, warnings of a U.S. recession, high household debt in Canada, and trade wars between global superpowers… How do HELOCs fit into that picture? How do they make us more vulnerable?
Oh man. Well, Canada is a small fish. We came out of the 2008 housing crisis looking pretty great because we had a solid banking system, very conservative, we had five big banks and not a different bank on every corner, like the States. But I think that’s starting to look like a falsehood — with our numbers, consumer debt and everything else.
If the U.S. and China get into a fight, everybody else gets dinged. So much of this is not in our control. But a lot of it comes down to Bank of Canada policy. They’ve painted themselves into a corner with low rates for so long. They can only go up. If rates start to go up and then back down, the bond markets are going to go nuts.
I think the fact that they didn’t start putting the brakes on this three or five years ago is going to hurt us the most. We’ve run up so much personal debt.
Insolvency filings have been at a dead low for almost a decade. So, what should’ve been a normal bloodletting a few years ago got artificially prolonged by low rates and housing prices going up.
I think 2019 and 2020 are going to be the years where it’s going to come apart.
But there are people in the media who would say, ‘Aw, he’s been saying that for two years.’ (laughs) So, get some corroborating evidence on that.
NOTE: This interview has been edited and condensed.