John Shmuel, editor-in-chief of RATESDOTCA
Extremely high prices and rising interest rates make the house affordable
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Home equity lines of credit (HELOC) were a common way for Canadian homeowners to take advantage of their home equity during the long run of low interest rates and rapidly rising home prices. housing over the last decade. However, a new survey by BNN Bloomberg and RATESDOTCA is illustrating vulnerabilities that could be lurking in some family balance sheets amid the recent sharp rise in interest rates. Twenty-seven percent of homeowners who participated in the survey said they had a HELOC. Seventy-eight percent of those people said they had used it, including half who said they had used it for the past two years. Those who said they applied for the HELOC from their lender, instead of offering one, were much more likely to have used it (85 percent versus 71 percent). More than half (58%) of respondents said they currently have a outstanding balance of their HELOC. Although most said they had 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 those over 55, suggesting that older Canadians have been taking advantage of the large gains they saw in the value of their home. This presents a risk, because many HELOCs are based on variable interest rates. This means that borrowers are pending higher payments as interest rates rise, which is exactly what has happened. Earlier this month, the Bank of Canada raised its benchmark interest rate by half a percentage point in response to what was, until then, the biggest inflation impression in three decades. It was the second consecutive climb of this magnitude. Since the beginning of the year, the central bank has raised its benchmark interest rate by 125 basis points (there are 100 basis points by one percentage point). The Bank of Canada’s next policy decision is scheduled for July 13, and the market is increasingly setting the price at a 75 basis point increase in the rate (several economists and strategists even predict a total rise). This would mean another jump 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 exactly that. Another 16 percent said they often paid only interest and sometimes paid off the loan. Fifty-five percent said they make regular payments beyond interest to reduce their HELOC debt. The other 21% of HELOC holders said they were unaware of their payment structure or chose not to answer the question. With a HELOC, homeowners can take advantage of their home equity by borrowing up to 80% of its value in combination with a mortgage. On Tuesday, the Office of the Superintendent of Financial Institutions announced some upcoming adjustments to the rules. By the end of 2023, borrowers should pay both the principal and interest on any combined loan amount in excess of 65 percent of the home’s value. Technically, HELOC lenders can demand full payment at any time, and consumers often have to pay their HELOC if they want to switch their mortgage to another lender. This can create a problem if borrowers do not allocate additional money to pay their HELOC in order to keep up with interest payments as rates go up. The survey found that the main use of a HELOC for borrowers was home renovations, with 43% saying reindeer were their main use of the loan. Another 30 percent said they used a HELOC for debt consolidation. Thirteen percent said the main use of their HELOC was the holidays. Leger surveyed 1,507 Canadians June 3-5; 972 (65%) of participants said they were owners. BNN Bloomberg has teamed up with RATESDOTCA to take the pulse of Canadians each month on key pocket issues as we strive to better understand how households are navigating COVID-19. This is the last installment of the special monthly coverage.