High prices and rising interest rates burden the affordability of housing
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Home equity credit lines (HELOCs) have been a common way for Canadian homeowners to leverage their home equity during the long period of low interest rates and the rapid rise in house prices over the past decade. However, a new study by BNN Bloomberg and RATESDOTCA sheds light on vulnerabilities that could lurk in some household balance sheets amid the recent sharp rise in interest rates. Twenty-seven percent of homeowners surveyed said they had HELOC. Seventy-eight percent of these people said they had used it, including about half who said they had used it in the past two years. Those who said they asked for HELOC from their lender, instead of being offered it, were much more likely to have used it (85 percent vs. 71 percent). More than half (58 percent) of respondents said they currently have a due balance in their HELOC. While the majority said they borrowed less than $ 50,000. 10 percent said they borrowed between $ 50,000 and $ 100,000. Another 10 percent said they borrowed more than $ 100,000. Larger balances of at least $ 50,000 were more common among people aged 55 and over, suggesting that more Canadians have reaped the huge gains they saw in the value of their home. This is risky because many HELOCs rely on a variable interest rate. This means that borrowers are on the hook for higher payments as interest rates rise, which is exactly what has happened. Earlier this month, the Bank of Canada raised its key interest rate by half a percentage point in response to what was, by that point, the biggest inflation printout in three decades. It was the second consecutive hike of this size. Since the beginning of this year, the central bank has raised its key interest rate by 125 basis points (there are 100 basis points in a percentage point). The Bank of Canada’s next policy decision is scheduled for July 13 and the market is increasingly pricing with an interest rate increase of 75 basis points (many economists and strategy analysts even predict a full unit increase). This would mean another leap in HELOC payments for variable rate holders. HELOCs allow borrowers to make interest-only payments, and the survey found that eight percent of HELOC holders do just that. Another 16 percent said they often only pay interest and sometimes pay off the loan. Fifty-five percent said they make regular payments in addition to interest to reduce HELOC debt. The remaining 21 percent of HELOC holders said they either did not know their payment structure or chose not to answer the question. With a HELOC, homeowners can leverage their home equity by borrowing up to 80 percent of its value combined with a mortgage. On Tuesday, the Office of the Supervisor of Financial Institutions announced some forthcoming adjustments to the rules. From the end of 2023, borrowers will have to pay both principal and interest on any combined loan amount over 65 percent of the value of the home. Technically, HELOC lenders can demand full payment at any time and consumers often have to repay their HELOC if they want to change their mortgage to another lender. This can be a problem if borrowers do not spend extra money to pay their HELOC in order to keep up with interest payments as interest rates rise. The survey found that the top use of a HELOC for borrowers was home renovations, with 43 percent saying reno was the main use of the loan. Another 30 percent said they used a HELOC to stabilize debt. 13 percent said the main use of HELOC was a vacation. Leger conducted the survey on 1,507 Canadians from June 3 to 5. 972 (65 percent) of the participants said they were homeowners. BNN Bloomberg partnered with RATESDOTCA to get the Canadian pulse every month on key pocket money issues as we try to better understand how households navigate COVID-19. This is the last installment in a monthly special coverage.
