Canadian real estate values soared, and have people scrambling to borrow against that value. Filings from Office of the Superintendent of Financial Institutions (OSFI) show that the total dollar value of loans secured by residential real estate reached an all-time high. This may be problematic in the personal loan segment, where the rate of growth has also hit an all-time high, at a time when interest rates are starting to climb.

Loans Secured By Canadian Real Estate

Loans secured by real estate are any loan where someone provides their home equity as a back up, if they can’t pay the lender back. These include Home Equity Line of Credits (HELOCs), or any other second mortgage product. They’re becoming very common in Canada, but aren’t without risk. Failing to pay back the loan, puts your own home equity at risk.

Banks break down these loans into two categories, business and non-business. Business loans secured by residential real estate have always been a normal thing. Many new businesses don’t have a credit history, so the owner often pledges their home in the event of default. This is that “good debt” people are always talking about. They’re borrowing in order to potentially make more money. This is in contrast to non-business purposes, which could be for any reason from financing a new kitchen, to providing the kids with a down payment for their very own condo.

Loans For Business Purposes Rise Over $9 Billion

Loans secured with residential real estate for business is posting double digit gains. The total balance was $32.518 billion in November, a 1.61% increase from the month before. That works out to a 38.6% increase compared to the same month last year. To put that in dollar terms, the balance rose $516 million over one month, and $9.052 billion from the year before. That’s huge growth, but the total dollar value is no where near personal loans.

Source: OSFI, Better Dwelling.

Personal Loans Secured With Homes Rises $15 Billion

Loans secured for non-business purposes hit a new record for growth. The total balance is $250.37 billion as of November, a 0.35% increase from the month before. That brings the 12 month gain to 6.4%, the largest annual gain in recent history. To put these in dollar terms, the balances grew $877 million from the month before, and a total of $15.072 billion more compared to the year before. Is this peak growth? Probably not, but it is the highest it’s ever been.

Source: OSFI, Better Dwelling.

Sometimes when we use giant numbers like this, they tend to lose all meaning. To give a sense of scale, $15.072 billion is a little larger than the average of two months of real estate sales across Greater Toronto in 2017. It’s also the same size as 6% of sales across Canada through the MLS in 2017. Saying it’s just a large amount of money is a bit of an understatement.

Borrowing against a home is becoming increasingly popular. Record low interest rates, and rising home values made it a low risk borrowing option for many. When borrowers start taking out down payment sized loans it becomes increasingly difficult to pay them back. Especially against a backdrop of rising rates.

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