Canadian vehicle buyers appear to have turned to home equity lines of credit (HELOCs) to fund their purchases in increasing numbers in recent years, as lofty home prices and low interest rates offered a favourable alternative to traditional vehicle financing.
The industry lacks a smoking gun, as data on how consumers use their HELOCs is scarce, but several key indicators and a preponderance of anecdotal evidence point to growing HELOC usage since the pandemic, auto and mortgage experts say.
“HELOCs have offered some of the lowest interest rates available and have flexible payment terms that differ from other lending products,” said Jonathan Parham, vice-president of operations for Dealertrack Canada, a unit of Trader Corp.
Dealertrack does not keep direct tabs on HELOC use, Parham said, but it has noted an uptick in buyers using their “own sources of funds” since the pandemic. Known as “cash” deals, these purchases include buyers spending available cash, as well as those using other lending sources, including HELOCs.
HELOCS GROW IN POPULARITY
HELOCs, a type of loan secured against real estate, have become increasingly popular over the past 10 years, as Canadian home values rose, and homeowners looked to tap into equity built through years of mortgage payments.
Data from Mortgage Professionals Canada (MPC), gathered from borrower surveys and current as of the end of 2022, found 18 per cent of Canadian respondents with a mortgage had accessed equity in the form of a HELOC.
The credit is most frequently used to fund renovations or other home improvement projects, said Cecely Roy, director of communications at the mortgage industry organization. But recent trends show more and more homeowners using HELOCs to make other types of large purchases.
At the end of 2022, 23 per cent of borrowers said they used funds from their HELOC for a large purchase such as a vehicle or education. This compared with 20 and 17 per cent of HELOC borrowers in mid-2022 and the end of 2021, respectively. MPC’s dataset does not break out vehicle purchases individually.
Roy said the rise in HELOC usage over the past few years has not come as a surprise.
“With any kind of economic shift or unpredictability in the market where things might be more costly, you can look at folks looking to access equity, regardless of what they may be leveraging that for.”
WHY HELOCS ARE ‘FAVOURABLE’
The low-interest rate conditions post-pandemic were “favourable” for consumers who turned to HELOCs, at least until the Bank of Canada began raising its prime interest rate last year, Parham added.
Robert Karwel, senior manager of J.D. Power Canada’s automotive practice, also sees the influence of HELOCs within the vehicle market. The rising rate of cash purchases are “directly linked” to HELOC usage, he told Automotive News Canada earlier this year.
J.D. Power data shows that so-called cash deals accounted for 12 to 13 per cent of vehicle purchases prior to the pandemic. That number rose to 25 per cent in the second quarter of 2023, largely at the expense of leasing.
HELOC usage also extends into the used-vehicle market.
As with other auto industry watchers, Daniel Ross, senior manager of industry Insights and residual value strategy at Canadian Black Book, said he lacks firm data points, but the continued strength of the luxury market likely indicates a role for HELOCs.
Value retention, particularly at the high end of the luxury segment has remained “very strong,” even with higher interest rates and vehicle costs hovering at near-record levels, Ross said. Many homeowners, having seen their equity bolstered over the past several years as home prices rose, can now “fall back on a HELOC.”
“It’s one affordability option,” though a better interest rate than traditional financing is not guaranteed, he said.
NO DRAWBACKS FOR DEALERS
The trend doesn’t have significant drawbacks for dealers, Ross added, but does heap on added risk for consumers, particularly if there were to be a significant downturn in the housing market.
While the auto retail sector lacks certainty about what proportion of buyers are relying on HELOCs, it’s likely a relatively small contingent, Parham said. He cited an AutoTrader.ca study of vehicle buyers’ intentions from earlier this year. The research found 63 per cent of consumers would look to finance or lease their next vehicle, compared to five per cent who intended to tap their HELOCs.
The equation will likely continue to evolve as interest rates fluctuate.
While HELOCs offered advantages to consumers when rates were low, the rising rate environment of the past 18 months is likely to put downward pressure on HELOC utilization as borrowing costs climb, Parham said.
Roy, on the other hand, said as consumers see daily expenses increase, the number of homeowners tapping into secured loans such as HELOCs is likely to stay steady, or even inch up.
“I wouldn’t be surprised if things maintained and potentially increased slightly in the percentage of borrowers accessing their home equity loans.”
