Borrowing Made Too Easy: Personal Lines of Credit

Personal CreditThe world is tilted a little bit this week, as Egypt is in crisis.  That has caused the price of oil to go over $100 per barrel and has increased the price of many food commodities on the world’s futures markets.  Sometimes things come out of nowhere to shape our economic future.  This past week Egypt provided the surprise.  What will it be next week?  Will this economic surprise spread causing some angst here back in Canada?

Of course, Egypt is so far away and back here in Canada we don’t have too many economic problems.  Sure, just this past week it was brought to my attention that my local municipality, Chatham-Kent had an unemployment rate of 11%.  I posted that on Twitter and then was immediately inundated from calls and then Huron-Perth area where they are hiring.  So in Canada many of our economic problems, especially unemployment is regionally based. In fact, compared to the rest of the world Canada is living a charmed economic existence.

I am sure there are some of you that would not agree with that.  Sure, here in southwestern Ontario our unemployment rates are way too high.  Families who have lost jobs in the recession have had a very difficult time getting anything back.  Sure, we could all go to Alberta but for many it is not that easy.  Still, with the Canadian dollar fluttering around par and with interest rates still very, very low, these are still pretty good economic times.  There is money out there; despite the way many of us are getting it.

I say that because a few weeks ago I wrote an article about the expanding debt levels in Canada.  At the time both the Bank of Canada Gov. Mark Carney and finance Minister Jim Flaherty changed some of the rules regarding mortgages in Canada.  They saw Canada’s burgeoning debt levels as a real problem and by tightening mortgage rules they were hoping to protect Canadians from their own propensity for more and more debt.  However, it looks like with interest rates at very low levels, Canadians are finding ways to borrow more and more money.

Personal lines of credit seem to be the vehicle for that.  I even have one of those myself.  A few years ago a banker told me that she’d like me to set up a personal line of credit based on the value of my house.  It was a bit strange to me at the time because I farm for a living so it is always a constant back-and-forth between farm and personal expenses.  The banker told me it would be a lot easier to get personal money if I simply had a personal line of credit based on the value of my house.  So I along with millions of other Canadians got them a personal line of credit based on their home value and the bank didn’t seem to care what we did.  In fact, I’ve often told the banker you really don’t care what we do with this money as long as we don’t go over our limits!

Looking back I think it was more a banking fad at the time because it gave the bank good security, Canadians could borrow up to 80% of the value of the home and it was all low risk to the bank.  I also think at the time that maybe the banker was having a contest to see how many customers she could look into it.  It’s worked out just fine for me and I’m sure many other Canadians.  Needless to say, it’s these personal lines of credit that are getting some of us in trouble.  Many Canadians are borrowing against their house to pay off higher cost debt vehicles.  In fact the finance department estimates that about 33 percent is used to pay off other debt and 20% is used for stock market investments.

Cutting to the chase, what happens if interest rates go back to 15%?  Perish the thought, but I have paid those rates in my lifetime so it is not impossible.  Even if rates go back to 10%, those large personal lines of credit could become very onerous, causing much angst in Canadian families.  That’s what the Bank of Canada is worried about and so is finance Minister Jim Flaherty.

So along comes Egypt and our economic system suddenly gets infused with uncertainty.  Oil prices rocket up over $100 a barrel and you can bet both Bank of Canada Gov. Mark Carney and Jim Flaherty are getting jittery.  Sure, times for many have never been so good based on those lines of credit.  If another Egypt comes along, spiking interest rates, it wouldn’t take much to make those good times seem so much more onerous.  I’m just saying.