HELOC holders could find budgets pinched by rising interest rates

According to a report by RatesDotCA, Canadians are using home equity lines of credit to help finance renovations and consolidate debt.

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Rising interest charges are already spelling trouble for some Calgary homeowners, who are seeing their budgets increasingly weighed down by debt on their home equity, according to a local mortgage broker.

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“We’ve seen people this year struggling with paying off their debt to the point of selling their home to buy something cheaper to consolidate their debt into one payment or even eliminate it,” says Matt Leggett, Senior Vice President and Mortgage Broker. on Ratehub.ca in Calgary.

“We don’t see this normally, but it’s happened a lot now because people are struggling to keep up with payments on their home equity lines of credit.”

His comments come in light of a new study showing that many Canadian homeowners with home equity lines of credit — or HELOCs for short — currently have an outstanding balance.

The RatesDotCA online mortgage market survey found that 58% of homeowners with a HELOC have a balance, of which about 8% are paying interest only.

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While the Bank of Canada is raising its key rate to control inflation, interest rates on these variable products have risen considerably in recent months. Rates are now jumping again after the last announcement from the Bank of Canada on July 13 raising its rates overnight by another 100 basis points.

The RatesDotCA study also notes that HELOC debt in Canada is not negligible, reaching $167 billion in March, according to Statistics Canada data.

Among the reasons for using their HELOC, the survey found that more than three in 10 Canadians use it for home renovations.
Similarly, 30% used their home equity to consolidate higher-interest debt at a lower rate, while 13% paid for a vacation with their HELOC.

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RatesDotCA mortgage expert Sung Lee in Toronto notes that rising interest rates on HELOCs have more of an impact on household budgets than variable rate mortgages because of the way interest charges are calculated.

“Depending on your amortization, the interest rate increases with a variable mortgage aren’t as significant because the calculation is based on the amortization,” he says, adding that the payment is a combination of interest and principal. . In most cases, borrowers see their amortization increase but not their monthly payments.

Interest charges, however, on a HELOC are calculated on the total amount owed, “so you’ll often see larger jumps in monthly payments.”

He adds that using a HELOC for home renovations in the low interest rate environment over the past few years made sense as long as homeowners had a repayment plan.

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The study found evidence that many – 55% – were repaying HELOC debt.

In addition, new rules from the end of 2023 from OSFI (Office of the Superintendent of Financial Institutions) will limit the maximum that borrowers can access to 65% instead of the 80% currently allowed.

Homeowners with pre-existing debt above this threshold will be required to make principal payments until the amount falls below 65%.

Leggett says people with HELOC debt are better served to pay it off as quickly as possible given rising interest charges. Additionally, HELOC debt can negatively impact their ability to move, as these costs increase their total debt service ratio, which cannot exceed 44%.

“A lot of other things have also changed which are hurting borrowers, including the (OSFI) stress test,” he adds.

A few months ago, most borrowers had to qualify at 5.25% – the Bank of Canada’s fixed benchmark rate. Now most have to qualify at their offered mortgage interest plus two percentage points.

“That means qualifying at almost six percent,” Leggett said. “So some can no longer qualify based on all of those factors.”

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