A house on Hillside Ave, in Toronto’s west end that has been sold, is on May 18.Fred Lum/the Globe and Mail
As interest rates tick up, financial experts expect to see delinquency on home equity lines of credit rise in the next few months, especially if inflation refuses to budge.
When interest rates rose in the past, it would take a year or more before it affected debt repayment, said Rebecca Oakes, vice-president of advanced analytics at Equifax Canada, a consumer credit bureau. But with the overnight rate climbing as quickly as it is now, Ms. Oakes believes we’ll see more consumer loan delinquencies begin to appear in the next three to four months.
“It could be a perfect storm,” she said.
Borrowers with home equity lines of credit, commonly referred to as HELOCs, could be particularly caught off guard. Following years of low interest rates and rising home prices, more than a quarter of Canadian homeowners have leveraged these gains by taking out a HELOC, according to a new survey commissioned by Ratesdotca, a comparison website for mortgage and financial rates.
Available to those who own at least 20 per cent of their home, HELOCs typically offer a revolving line of credit at variable rates – for up to 65 per cent of a home’s value – that only requires the borrower to make interest payments every month. The principal debt can be paid back as one chooses. The lending product became increasingly popular during the pandemic, which saw many using HELOCs to fund renovations while they were stuck at home.
The survey, conducted by Léger and BNN Bloomberg, found that among the 27 per cent of Canadian homeowners who hold a HELOC, nearly six in 10 carry an outstanding balance on their loan. This figure is supported by data provided by Equifax Canada that show 58 per cent of HELOC holders have an outstanding balance.
Approximately 8 per cent of HELOC holders surveyed only manage to pay interest on their debt, without touching the principal.
Among those who have tapped into their HELOC, the average outstanding balance sits at $102,000, according to Equifax Canada’s latest figures. However, that number is likely skewed by a smaller group of folks who owe significantly more than most. The majority of HELOC holders surveyed in the Ratesdotca poll said they owe between $10,000 and $50,000.
For the past 10 years “it’s been great to own HELOCs,” said John Shmuel, director of content strategy and PR at Ratesdotca. But the picture is different now. Today’s economic gloom will be the first big test for HELOCs in Canada, and it may be a wake-up call to some, he said.
“Borrow prudently. Don’t just rest on your laurels thinking that rates are going to stay low forever,” Mr. Shmuel warned. “That can come back and hurt you.”
According to filings from the Office of the Superintendent of Financial Institutions, homeowners in Canada accrued $2-billion in HELOC debt this past February, the most in a single month since 2012. As of this past April, Canadians owe approximately $168.8-billion in HELOC debt.
Amid concern over elevated household debt, some observers expected the OSFI to clamp down on HELOCs in last week’s regulatory update. While that didn’t happen, the agency did slightly tweak rules for readvanceable mortgages, in which a traditional mortgage is combined with a HELOC that increases in size as a customer pays down mortgage principal.
Any benefits to the financial system owing to the OSFI’s tinkering will be “virtually imperceptible,” said Rob McLister, a mortgage strategist.
With a file from Rachelle Younglai
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Ben Mussett