Outstanding HELOC debt likely to rise soon as interest rates rise, experts say

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A home on Hillside Ave in west Toronto that was sold is May 18.Fred Lum/The Globe and Mail

As interest rates rise, financial experts expect home equity line of credit delinquencies to rise in the coming months, especially if inflation refuses to budge.

When interest rates rose in the past, it took a year or more before it affected debt repayment, said Rebecca Oakes, vice president of advanced analytics at Equifax Canada, a credit bureau to consumption. But with the overnight rate climbing as fast as it is now, Ms Oakes thinks more consumer loan defaults will start to show up over the next three to four months.

“It could be a perfect storm,” she said.

Borrowers with home equity lines of credit, commonly known as HELOCs, could be particularly caught off guard. According to a new investigation commissioned by Ratesdotca, a mortgage and financial rate comparison site.

Available to those who own at least 20% of their home, HELOCs typically offer a variable-rate, revolving line of credit — up to 65% of a home’s value — that only obligates the borrower to make mortgage payments. interest each month. Principal debt can be repaid at will. The loan product has become increasingly popular during the pandemic, which has seen many use HELOCs to fund renovations while stuck at home.

The poll, conducted by Leger and BNN Bloomberg, found that among the 27% of Canadian homeowners who hold a HELOC, nearly six in ten have an outstanding balance on their loan. This figure is supported by data provided by Equifax Canada which shows that 58% of HELOC holders have an outstanding balance.

About 8% of HELOC holders surveyed only manage to pay the interest on their debt, without touching the principal.

Among those who have dipped into their HELOC, the average outstanding balance sits at $102,000, according to the latest figures from Equifax Canada. However, this number is likely skewed by a small group of people who owe a lot more than most. The majority of HELOC holders surveyed in the Ratesdotca poll said they owe between $10,000 and $50,000.

Over the past 10 years, “it’s been great to own HELOCs,” said John Shmuel, director of content strategy and public relations at Ratesdotca. But the picture is different now. Today’s economic gloom will be the first big test for HELOCs in Canada, and it could be a wake-up call for some, he said.

“Borrow carefully. Don’t rest on your laurels thinking that rates will stay low forever,” Shmuel warned. “It can come back and hurt you.”

According to documents filed by the Office of the Superintendent of Financial Institutions, owners in Canada have accumulated $2 billion in HELOC debt last Februaryhighest in a month since 2012. Last April, Canadians owe about $168.8 billion in HELOC debt.

Amid concerns over high household debt, some observers expected OSFI to crack down on HELOCs in last week’s regulatory update. Although that hasn’t happened, the agency has slightly changed the rules for repayable mortgages, in which a traditional mortgage is combined with a HELOC that increases in size as a customer pays off the principal of the mortgage. .

Any benefit to the financial system from OSFI’s tinkering will be “virtually imperceptible,” said Rob McLister, a mortgage strategist.

With a file by Rachelle Younglai

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