The boom in housing prices has Canadians feeling richer. It also has many of them leveraging themselves to their eyeballs, using the value of their houses and condos to borrow on lines of credit and second mortgages.
"Some people are using the money to diversify their investments and buy securities, which is tax deductible. But others are using it to renovate their houses, take trips or finance private school fees," says a banker who deals with richer clients.
The size of loans is growing faster than the value of the houses, according to Statistics Canada. "The growth in outstanding line-of-credit debt… surged 2.3 times," reported Statscan's The Wealth of Canadians survey, which covered the period from 1999 to 2005. At the same time, the average value of the principal residence rose 32.6%.
"The number of family units with line-of-credit debt increased almost 77% to 3.3 million," said Statscan. A quarter of all families now have line-of-credit debt.
The way the line of credit works is simple: Say your house is worth $750,000 and you have a mortgage of $250,000. After the bank sends out an appraiser, it will give you a line of credit for 80% of the difference. It's easy to tap into the cash once the line of credit is open.
"I have a lot of clients in their 50s and 60s who still have mortgage-based
Many financial planners will advise borrowing against the house, if the money is invested debt. The previous generation paid off their mortgage and never borrowed against it."
Many financial planners will advise borrowing against the house, a non-performing asset, if the money is used to invest. "I'm a big fan of prudent investment leverage, especially when you consider the tax deduction and the long-term growth of a balanced portfolio of global stocks," says Moshe Milevsky, of the Schulich School of Business at York University.
There are other ways of leveraging. If you're among the sliver of the population in the super-rich category, you can get cash from another dead asset -- the art on your walls.
"We are in the process of setting up an art-lending program, so that people can borrow against what is a passive asset," says Sam Sivarajan of UBS Canada. Mr. Sivarajan is in charge of what bankers call ultra-high net-worth families, with assets of $50-million or more. UBS estimates there are 2,700 families in Canada in that category.
One of the problems with lending against art is that banks like collateral and art collectors like their art on the wall, not in a vault. UBS has worked that out. It has a group of art experts at their head office in Switzerland who assess how much a work of art is worth. "For now we're doing it on a case-by-case basis," says Mr. Sivarajan.
The art loan is the same as the line of credit on your house, except in some cases the art is worth more than the house. - Fred Langan is host of CBC News Business.
