Equifax Canada: Surge in HELOC Use Could Become Troublesome Should Interest Rates Increase

Historically low interest rates have caused the demand for home ownership to soar to record levels, as work-from-home flexibility sparked a need for more spacious accommodations outside of urban centers. However, the attractive borrowing costs have also fueled an increase not only in mortgage loans, but also a comeback in Home Equity Lines of Credit (HELOC), which according to Equifax Canada, could prove troublesome should interest rates increase in the near future.

The credit monitoring company found that the number of HELOCs issued to Canadian households has risen 56.7% in the second quarter of 2021 compared to the same period a year ago. According to Equifax Canada assistant vice-president of advanced analytics Rebecca Oakes, though, such a sharp increase is alarming, because “often the payments are tied to a variable interest rate.”

Oakes warns that in the event interest rates jump sooner than projected, numerous homeowners may face obstacles in meeting their financial obligations. Bank of Canada Governor Tiff Macklem insists that any inflation that does arise will be merely temporary, but did hint that interest rates could rise by the end of 2021. “With many consumers now heavily leveraged and the potential for increases on variable rate mortgages and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise. This can lead to higher insolvencies,” Oakes explained.

Equifax Canada also found that new mortgage loans were up 60.2% from the second quarter 2020, largely due to an increase of home ownership in British Columbia. This marks the sharpest quarterly increase on record, and was primarily responsible for the surge in consumer debt, which totalled $2.15 trillion between April and June. Indeed, mortgage loans have significantly contributed to the rise in household debt, as data from Statistics Canada found that the total value of mortgages increased 1.2% in June— the largest jump since 2007.

Information for this briefing was found via Equifax Canada and Statistics Canada. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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