Interest rates are rising and 58% of Canadian HELOC holders have an outstanding balance

Key findings

• 27% of Canadian homeowners have a home equity line of credit (HELOC).
• Those who requested a HELOC from their lender are significantly more likely to have used it (85%), and to have used it in the last two years (81%).
• Nearly six-in-ten (58%) HELOC holders have an outstanding balance.
• 43% of HELOC holders say they used their HELOC for home renovations.

Despite month-over-month signs of a cooling housing market, house prices in Canada remain high and have been for some time. When you tack on the Bank of Canada’s recent interest rate hikes, paying off a mortgage, let alone a line of credit secured by one, is increasingly difficult. According to Statistics Canada, debt owed on home equity lines of credit (HELOC) increased by 0.3% in March, reaching $167.3 billion. That’s on top of February’s $2 billion increase, the highest month-over-month growth since 2012.

With the current overnight rate sitting at 1.5% and more drastic rate hikes forecasted, many homeowners may need to start cutting down their debt — and fast — since HELOCs are a variable-rate product impacted by the Bank of Canada’s interest rate moves. A recent Leger survey conducted on behalf of RATESDOTCA and BNN Bloomberg found most Canadians with a HELOC currently have an outstanding balance (58%). And with interest rates on a steady incline, HELOC holders need to be prepared for rising payments.

27% of Canadian homeowners have a HELOC

Of the 27% of Canadian homeowners who have a HELOC, the majority earn $100,000 or more annually (34%) compared to those earning $60,000 to <$100,000 (29%) and <$60,000 (19%). While high-income earners can often build home equity quicker than lower income households, why might they have chosen to take out a HELOC in the first place?

One reason could be for investment purposes. Using your home as collateral can offer some of the lowest interest rates in the market. If you invest your HELOC funds, the interest paid is also tax-deductible. During the pandemic, many investors were able to borrow at rock-bottom rates and make a significant return in many different asset classes. However, there are risks, such as amplified losses and rising borrowing costs.

Regardless of income, those with variable-rate mortgages and HELOC balances should plan to account for higher interest on both products moving forward.

58% of HELOC holders have an outstanding balance

While the majority of survey respondents who have purchased a home owe money on their HELOCs, there are still outstanding mortgage payments to account for. And unfortunately, rising interest rates could drive those with mortgages to sell. Nearly one-in-four Canadian homeowners say they’ll have to sell their home if interest rates continue to rise, even before considering an outstanding HELOC balance.

Surprisingly, there isn’t much difference in the number of Canadians who owe less than $5,000 (11%) on their HELOC and those who owe more than $100,000 (10%). But when we break down outstanding balances by age, the majority of HELOC holders with outstanding balances are aged 18-54 and owe between $10,000 and $50,000.

Only 55% make regular payments to decrease debt while one-in-ten (8%) only pay interest without touching the principal. This borrowing behaviour can quickly lead to a hole of debt, particularly for the 13% of those aged 55+ with more than $100,000 balances.

While HELOCs require interest-only payments, they’re considered demand loans and can be recalled by lenders at any time if payments are missed. A lender can also lower a borrower’s HELOC limit or convert it to a mortgage-style loan, requiring both principal and interest payments. While paying interest only can provide some cash flow relief, it can be dangerous. Often, consumers can eventually consolidate into a mortgage refinance if they need more structured payments.

Those who requested a HELOC are significantly more likely to have used it (85%), and to have used it in the last two years (81%)

Homeowners who initiated the HELOC request from their lender are also significantly more likely to owe a balance on it (66%), and to owe more than $100,000 (17%).

Given that 81% of those who requested a HELOC used it in the last two years, it’s no surprise the pandemic years triggered an increase in HELOC use. While many were left without consistent income and interest rates were low, taking out a loan against your home equity was an easy solution. Though this once made sense for cash-strapped homeowners, the current rate environment may soon make a six-figure debt balance next to impossible for the average Canadian to pay off.

If the few (8%) that pay only the interest each month on their HELOC have been paying only what they can afford, each rate hike that comes will make it harder to put a dent in the debt itself.

Two-in-five (43%) primarily used their HELOC towards home renovations

The renovation boom of the last two years saw Canadians tap their HELOCs. Of the 31% of homeowners who put funds toward home renos, 43% said this was the main avenue for their HELOC use. Other top uses for HELOCs included debt consolidation (30%) and vacations (13%).

While renovations are likely to increase the resale value of your home, high interest rates have the potential to counteract the payoff expected from home improvement projects. If, for example, housing prices steadily cool as interest rates continue to rise, many Canadians may not get their money back, and will be left to bear the loss.

When it comes to HELOCs, it’s best to have a repayment plan. Creating a budget and a scheduled pre-authorized payment that includes some principal repayment is one way to regain control amidst rising rates. Avoid using a HELOC as a chequing account for day-to-day expenses. Instead, use it for emergency purposes, to save interest by paying off higher-interest debt, or to make money (under the advice of a professional). If you notice the balance never goes down, consider refinancing into a mortgage that provides forced, disciplined payments.

It’s crucial that those with substantial HELOC debt begin paying the principal owed and remember to weigh the difference between wants and needs when accessing a revolving, soon-to-be higher-interest loan.

Methodology

An online survey of 1,507 Canadians (972 homeowners) was completed between June 3 and 5, 2022, using Leger’s online panel. No margin of error can be associated with a non-probability sample (i.e. a web panel in this case). For comparative purposes, though, a probability sample of 1,507 respondents would have a margin of error of ±2.5%, 19 times out of 20.