3 million Canadians have home equity lines of credit, but half of us don’t know how they work.
A survey suggests 35 per cent of Canadians have a home equity line of credit and 19 per cent said they’d borrowed more than they intended. (Canadian Press)
Over the past 15 years, home equity lines of credit have emerged as the driver of mounting non-mortgage debt in Canada — yet many Canadians don’t understand what they’ve signed up for and are not moving to pay them off, a new survey suggests.
The more than three million Canadians holding a HELOC owed an average amount of $65,000, the study released Tuesday by the Financial Consumer Agency of Canada (FCAC) found. About one quarter of HELOC holders had a balance of more than $150,000.
Yet 25 per cent of respondents said they only made the interest payments month to month.
Ipsos conducted the online survey of 4,800 Canadians, most of them homeowners, from June 5-28, 2018, on behalf FCAC, a federal agency that promotes financial education.
HELOCs are revolving credit products secured against the equity in a home. Banks can lend up to 65 per cent of the value of a home. Such lines of credit have been easy to get and banks offer them as a default credit option to anyone with home equity.
Of the homeowners surveyed, 54 per cent had a mortgage and 35 per cent had a HELOC.
Cheap source of credit
“You can’t deny the fact that for the consumer it is a cheap source of credit. However, you have to use it well,” said Michael Toope, communications strategist for FCAC.
The problem is that people borrow more than they intended and end up struggling with the debt, he said.
The survey suggested there is a lack of understanding among consumers of how these lines of credit work.
Only half of respondents knew basic facts about the terms of HELOCs, such as:
Banks can raise the rate of a HELOC at any time.
The bank can demand the balance of a HELOC at any time.
There are fees to transfer a HELOC to another institution.
The bank can raise or lower the credit limit on a HELOC.
Interest rates began climbing in 2017 and 2018 and are likely to rise further this year. That affects the interest cost of these loans and the overall cost of paying them off. Your HELOC is more expensive than a mortgage as the interest rate is higher.
“Each bank sets its own prime rate based on the Bank of Canada rate and HELOCs are usually set at prime plus a premium, but the bank can change that premium at their discretion,” Toope said.
For some, HELOCs are risky
Almost two-thirds of respondents said they used their HELOC only or mostly as intended, as a revolving line of credit.
Yet for some, HELOCs are a risky product that eats away at their ability to build wealth, Toope said.
The equity they build in their home as they pay off a mortgage is a way for Canadians to build wealth over time, but that won’t happen if they have a debt secured by the house.
“In the end, you’re losing the long-term value of the mortgage you have in your home,” Toope said.
In a 2017 report, FCAC found home equity lines of credit may be putting some Canadians at risk of over-borrowing.
That report found most consumers do not repay their HELOC in full until they sell their home.
About 19 per cent of respondents to the new survey said they’d borrowed more than they intended.
How much do I owe?
And 18 per cent said they did not know the full balance on their HELOC.
Among those who paid only the interest on the debt, the majority were young Canadians, aged 25 to 34. That’s not unusual, as people at that stage of life tend to have lower incomes and may be burdened with student debt as well as a mortgage, but it still indicates a lack of understanding, Toope said.
The survey found 62 per cent of those who paid only the interest expected to repay their HELOC in full within five years, a plan Toope called a “mathematical impossibility.”
Half of Canadians borrowed against their HELOCs for renovations, but another 22 per cent dipped into it for debt consolidation, with vehicle purchases and daily expenses also common uses, according to the survey.
“People should know what they are going to use it for and how to pay it down, so it doesn’t become an eternal revolving debt,” Toope said.
A recent report from Equifax Canada in October 2018 concluded that consumer debt is still on the rise in Canada.
“Consumers will have tighter cash flows as interest rates climb further, which can lead to people not paying off their credit cards in full each month.
After a period of sustained economic growth, we’re moving back to a slow and steady pace. And finally, new mortgage volume has been negative over the last three quarters.
Add these together and we should begin to see upward movement in delinquencies.”
It’s unfortunate that the government has been focusing on controlling mortgage borrowing and home ownership in Canada while neglecting the impact of high interest credit card debt and the affect it is having on the financial health of Canadians.
Statistically, the amount owing is less on credit card debt than mortgage debt but the overall cost of borrowing is so much higher.
Making these large monthly payments restricts your cash flow while reducing opportunities for retirement planning and saving for the future.
Let’s take a quick look. If you aren’t paying off your credit card balance monthly, how much do you think you really paid for the big screen TV that you bought on sale after Christmas?
If you carry on only making the minimum monthly payment on the credit card after purchase, here’s what it could cost you.
If you paid $2,000 for that TV with an interest rate of 19.5 per cent on your credit card and you are just make the minimum monthly payments, it will take you more than 14 years to pay for your TV.
Yes! Fourteen years!
And it will cost you over $4,000!. (It could actually take longer and cost you more depending on the minimum payment requested by your credit card company and the interest rate being charged).
Buying this TV on credit is not a bargain.
There are dangers to borrowing to the max on your credit cards as it can leave you with very little wiggle room.
What happens if interest rates start to rise? All indications are that interest rates are on the rise moving forward into 2019.
The answer is that your minimum payment will just get bigger and bigger. And what happens if you lose your job?
How can you possibly keep making those minimum monthly payments?
If you are a homeowner, there are great possibilities for real savings by using the equity in your home as a debt consolidation tool.
The most attractive reason for consolidating debt into a mortgage is that there will definitely be savings simply by lowering the interest rate you are paying on your debt.
Another reason would be to lower your monthly payments.
This could free up cash flow to start investing and saving for retirement.
There could be some costs involved if you must break your current mortgage and there are many variables at play here:
interest rates
amortization
fees
penalties for your specific situation.
You may find the overall cost of borrowing to be higher or lower than your current situation. Always run through the math with a mortgage broker.
The benefits really depend on how the math works out and whether you are committed to changing your lifestyle to prevent charging up the balances on those credit cards again.
You will need to master a budget.
If you would like a no obligation review of your current situation, please give me a call.
National housing starts fell for the third consecutive month in October, in what some industry experts are calling a further sign that the Canadian housing market has adjusted to policy changes introduced earlier this year.
Housing starts fell 5.1 per cent last month, reducing the 6-month trend to 207,800, the lowest level since early 2017.
One thing the lower numbers could affect? Increasing the Bank of Canada’s confidence in following through on its already likely interest rate hike later this month.
“Demand continues to be supported by the fastest population growth in 27 years and new millennial-led households,” writes BMO senior economist Sal Guatieri, in a recent note. “A calmer housing market is just what the doctor ordered, and won’t discourage the Bank of Canada from raising rates on October 24.”
The BoC hiked the overnight rate to 1.50 basis points in July, and many industry experts are predicting another hike later this month.
“The September housing starts report fits with the relative calm and return to normality in sales, market balance and price growth that we are seeing across most of the country this year, in particular Toronto, following speculative excesses in Southern Ontario earlier last year and a moderate correction in response to policy measures earlier this year,” writes Guatieri.
Guatieri is referring to the effects of the Ontario government’s Fair Housing Plan, which came into effect last spring, and a new mortgage stress test introduced in January. Many economists agree that the market has largely adjusted to the policy changes, and will continue to gradually warm over the coming months.
RBC senior economist Nathan Janzen agrees that the starts report will be unlikely to dissuade the BoC from raising rates on the 24th.
“Earlier housing market activity was probably too strong to be sustained,” he writes, in a recent note. “The slowing to a more manageable pace of activity should be welcomed by the Bank of Canada and isn’t expected to prevent further gradual interest rate hikes.”
As you know, your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate and here is your personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.
At 10:00 am EST, Wednesday May 30, 2018, the Bank of the Canada again maintained their overnight rate which means no change to your interest rate. Let’s not forget that interest rates are still low and this is a great time to take advantage. As the spring market is in full swing right now here are a few things that might’ve been on your mind lately.
News & media. There has been A LOT of buzz in the past few weeks about the housing market taking a major plummet. One of the key factors I have been discussing is how 2017 was an outlier year. Meaning these numbers were so far off trend they are skewing results and thereby allowing the media to develop a news frenzy on how the housing market is plummeting. Remember if you compare this year so far with any other year we are pretty on trend for standard growth and days on market. Keep this in mind when you make any real estate decisions this year.
Renewals. After all the regulation changes at the end of 2017, nobody was really sure of what the effect would be on upcoming renewals. After monitoring the trends this spring, it has become apparent that lenders are taking advantage of your qualifying position and are sometimes using this to their advantage. Moral of the story is I am still here to work with to find the best options, whether that is staying with your current lender or moving. What is essential to this strategy is having a plan! If you have a mortgage renewal coming up this year, reach out to me now and let’s start exploring what your options are and how we can get you closer to your goals! I have some really amazing options from lenders that can making switching an option for you!
It’s time to chat about your options! It is never too late, or early, to start planning. I’d be happy to make your plans become a reality.
To continue with the Bank of Canada news, here is an excerpt of the announcement and what they had to say about their decision:
“Global economic activity remains broadly on track with the Bank’s forecast. Recent data points to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.
Inflation in Canada has been close to the 2% target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2%, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.”
Overall, to keep inflation near target, the bank continues its assessment that they will take a gradual approach to rates increasing guided by incoming data – something that we have all known for a long time! Remember, that any increase to the prime rate since 1992 has only been by 0.25% at any ONE time, so you won’t see a large significant increase all at once.
Fixed term interest rates have fluctuated up and down a bit over the last four weeks with a range of 3.39% to 3.59% for a five-year fixed term – but three-year terms in the 3.09% to 3.19% range. Don’t forget that if you want to lock in you can take a shorter term that will typically have a lower rate attached to it. If the net interest rate on your current variable is the same as or higher than the current fixed term rates right now, even though the prime rate will still remain low for a while now, it might be time to chat about your options including potentially converting to a fixed term. Converting to a fixed term isn’t right for everyone as other factors are to be taken into consideration such as payment change, income and future plans such as renovating, moving etc.
Based on this recent announcement, and the anticipation that the prime rate will remain low through the spring market, I’d recommend that you remain with your current variable rate product as the interest is still lower than a fixed term rate right now. However, if having a fixed payment is important to you, call me so I can calculate what your new payment would look like and also if it is suitable for you. I’ll be in touch again for the next announcement on July 11, 2018.
I wonder if I can ask a favour; It is that time of year that many think about what they want to accomplish this year – if buying their first home is on the “wish list”, would you mind passing my contact information on to them. With all the hot markets out there now, and changes to mortgage legislation, there is a lot of confusion especially amongst our first-time home buyers and my specialty is walking them thru the steps with ease! This is very much appreciated.
The leaves are falling, but the sky is not! We know this year has had a lot of changes in the lending landscape, so let’s chat about what this means for you!
As you know, your variable rate mortgage, line of credit and/or student loans are all based on the Prime Rate and here is your personal update from me on the recent Bank of Canada announcement on changes to their Overnight Rate which in most cases impacts your Prime Rate.
At 10:00 am EST, Wednesday October 25, 2017, the Bank of Canada maintained their overnight rate which means no change to your interest rate. I know you may be feeling the impact of the rate changes earlier in 2017, but you can feel at ease that your rate will stay the same for now.
In the last few weeks there have been additional changes in the mortgage legislation and qualifying guidelines all in the hope of maintaining stability in the real estate market as well as ensuring home owners and those with significant debt can handle future interest rate increases. These changes will impact your plans for borrowing funds in the future – whether it is refinancing to maximize the low interest rates and equity in your home, purchasing rental properties or moving up into a bigger home? Call me now for a complimentary consultation to review your current financial situation and let’s start planning now. These legislation changes don’t come into effect until January 1, 2018, so let’s make sure we get you prepared now and ensure the changes won’t impede your future borrowing plans.
To continue with the Bank of Canada news, here is an excerpt of the announcement and what they had to say about their decision on Wednesday:
“Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019. Exports and business investment are both expected to continue to make a solid contribution to GDP growth. However, projected export growth is slightly slower than before, in part because of a stronger Canadian dollar than assumed in July. Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past. The Bank estimates that the economy is operating close to its potential. However, wage and other data indicate that there is still slack in the labour market. This suggests that there could be room for more economic growth than the Bank is projecting without inflation rising materially above target. Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”
Based on this outlook, the Bank estimates that the economy is operating close to its full potential. But they have indicated that they will be cautious in making future increases in order to determine the impact of the adjustments earlier this year. Remember, taking advantage of these low rates is a great way to pay down your mortgage faster!
Fixed rates haven’t really changed at all since the last announcement, and are around 3.09% to 3.39% for a five-year fixed term.
Currently variable rate products are still lower than current fixed term rates, however if concern regarding impending rate increases is going to affect your monthly budget, locking in now might be a good option. Call me to book a complimentary consultation and let’s discuss your current financial situation.
We are in the middle of a frenzy of activity with our Spring Real Estate Market so there is a big competition of low rate offerings in the Mortgage Market that has both Mortgage Brokers and banks competing with each other and advertising very low rates.
So the most frequent question that I hear from clients – “What is your best rate?” and why wouldn’t you ask that question? The media is flooded with articles about how to shop for the best mortgage rate and rate sites are popping up all over the internet. That must be the most important question to ask when you are shopping for a mortgage. Right?
The worst kept secret? It’s really easy to get a low interest rate on your mortgage. All you have to do is make a couple of calls for rate quotes then pit your mortgage broker against your bank or vice versa and one of them is going to beat the other on rate. Excellent!
So back to your question – “What is your best rate?” Now you make think that this is an easy question for a Mortgage Broker to answer but it’s really very complicated. You want me to just tell you what my best rate is for a certain term of mortgage. But I’m conflicted and I don’t really want to answer that question directly because I want you to understand that you aren’t asking the right question.
Understanding that the interest rate is only one small part of your mortgage’s terms and conditions is important. If you take a look at your mortgage documents, the interest rate is only mentioned once on the very first page. Have you ever wondered what’s in those other 25 pages?
There are dozens of mortgage lenders in Canada – mortgage companies, banks, credit unions, trust companies, etc. and there are many differences within their mortgage documents that lay out the terms and conditions of your mortgage such as prepayment options and the penalties for breaking your mortgage early, portability and assumption options, and even renewal terms. But you know what? There is very little difference in their rates.
What could be in the fine print? Perhaps the mortgage is closed for the 5 year term. 100% closed. That’s the trade-off for an extremely low rate.
Some of these low rate mortgages are “no-frills” mortgages which means they are packed with many restrictive conditions and potential landmines. If you commit to one of these products without reading all of the fine print, which most often happens, you could find yourself in a situation that you may find difficult in the near future, meaning sometime in the next 3 years given that 6 out of 10 Canadian mortgage holders break their mortgage at about the 38 month mark.
There is no denying that rate is important but what is the right question that you should really be asking? “What is the best mortgage available that is going to meet both my short-term and long-term goals?” and yes it should have a competitive interest rate. Ensure that you read and understand ALL of the fine print in your mortgage’s terms and conditions.
So give us a call we will discuss rate at some point in our conversation but ensuring that you understand all of the terms and conditions of your mortgage contract is really more important to a Mortgage Broker.
