The Office of the Superintendent of Financial Institutions (OSFI) revealed Canadians had an outstanding balance of $171.1 billion on their home equity lines of credit (HELOC) at the end of June, a .6% increase from May and a 2.9% increase from June 2021..A HELOC is a secured form of credit, with the lender using your home as a guarantee that you'll pay back the money you borrow. HELOCs are revolving credit, allowing you to borrow money, pay it back, and borrow it again, up to a maximum credit limit..The annual growth rate was the highest in almost a decade said Better Dwelling, a Canadian real estate news site, after analyzing the OSFI data..“The 2.9% growth in June was the biggest since February 2013. The rise of [combined loan plans] has largely reduced the growth rate in this area, so consider this just a fraction of the loans secured by home equity,” said Better Dwelling..A recent survey conducted by Leger on behalf of Bloomberg and RATESDOTCA found approximately 27% of homeowners have a HELOC..Of them, 78% said they used their HELOCs, with 85% who requested their HELOC being more likely to use it, compared to 71% of those who had been offered a HELOC..Of the respondents to Leger’s survey, 58% said they have outstanding balances on their HELOCs, with 10% borrowing between $50,000 and $100,000; another 10% borrowing more than $100,000; and the balance borrowing less than $50,000..Larger balances of at least $50,000 were more common among those aged 55 and up, suggesting older Canadians have been leveraging the large gains they saw in their homes’ values..Canadians have varying reasons for using a HELOC, according to the poll: 43% used their HELOCs for home renovations; 30% used them for debt consolidation, and; 13% used the money to take a vacation..HELOCs were a common and efficient way for homeowners to tap into their homes’ equity during the long run of low interest rates and rapidly rising home prices over the past decade..However, the survey sheds light on the vulnerabilities that could be lurking on some household balance sheets with the recent steep rise in interest rates. Many HELOCs are based on variable-rate interest, meaning borrowers are on the hook for higher payments as interest rates rise, which they started to do in March..In July, the Bank of Canada surprised some market watchers and shocked others by raising its rate by an unprecedented 1%..The bank’s next policy decision is scheduled for Sept. 7, and the market is increasingly pricing in a .75% increase, with some not ruling out another 1% rise..HELOCs allow borrowers to make interest-only payments, which 8% of HELOC holders do, according to the survey..Another 16% said they often pay interest-only, occasionally paying down the loan..More than half, 55%, make regular payments beyond interest to decrease their HELOC debt..The other 21% said they either didn’t know their payment structure or chose not to answer the question. With a HELOC, homeowners could tap into their home’s equity by borrowing up to 80% of its value in combination with a mortgage, however OSFI has recently changed the rules..As of late 2023, borrowers will be required to pay both principal and interest on any combined loan amount above 65% of the home’s value. Technically, HELOC lenders can demand payment in full at any time, and it’s not unusual that borrowers have to pay off their HELOC if they want to switch their mortgage to another lender..If borrowers are not setting aside extra money to pay down their HELOC in order to keep up with interest payments as rates rise, it can create problems..If housing markets take a dramatic downturn, and your home suffers a loss in appraisal value, your equity is affected as well. When this happens, your lender can enforce a HELOC reduction so that your borrowing limit is based on the equity that remains. If a home is in negative equity territory, you will see a HELOC freeze..It may be Canadians have seen the worst of the housing downturn over the summer..The home buying ‘season’ begins mid- to late September and as the bank continues down its path of rate hikes, Canadians will know within six to eight weeks if the downturn will become more pronounced.
