HELOC Payments Now More Burdensome

Canadians are forking out more each month to stay current on their Home Equity Lines of Credit (HELOCs).

Homeowners in Toronto, for example, are shelling out a whopping 14.5% more ($593) each month on their HELOC payments, versus just one year prior. That’s according to recently released first-quarter data from the Canada Mortgage and Housing Corporation (CMHC).

In Vancouver, HELOC servicing costs jumped 12.3% to $667 a month. That’s nearly three times the rate of increase for mortgage servicing costs, which rose “just” 4.85% to $1,881 a month.

What’s Behind It

Multiple factors drove the Q1 surge in HELOC payments. Among them:

• “Elevated housing prices led to larger mortgages and made HELOCs more attractive to individuals looking to tap into their home equity gains,” CMHC noted in its report
• HELOC rates were higher in Q1 versus the prior year (roughly 4.45% versus 3.95% in Q1 2018)
• Q1 was a big quarter for consumer spending (+2.9%)
• Debt loads keep rising in general (non-mortgage debt climbed 4.9 percent in Q1 year-over-year)

The interesting thing is that sales of new HELOCs fell 10 percent in the first quarter, says TransUnion. This suggests higher interest rates and borrowing from existing HELOC holders are mainly driving the higher servicing costs.

In addition, according to a report from the Financial Consumer Agency of Canada (FCAC) earlier this year, 27 percent of HELOC borrowers are only paying the minimum interest due each month. A sizable 30% used their HELOCs to finance their other debts, such as credit cards, car loans and mortgages. Average HELOC balances were approximately $65,000, FCAC said.

Delinquencies Low, Credit Scores High

Despite fast-growing monthly HELOC payments, fundamentals remain solid enough to keep the market stable, CMHC notes.

For one thing, “…delinquency rates remain low, supported by strong labour market conditions,” CMHC’s Jordan Nanowski wrote of the Ontario market. For another, HELOC borrowers have ample spare equity. Indeed, while no one should rely on it, HELOC users can tap their credit lines in a worst case to keep up on their payments. Just keep in mind that banks can theoretically limit your credit if all you ever do is pay interest and no principal.

As for B.C., CMHC’s Pershing Sun wrote: “Despite a high level of indebtedness, consumers maintained high credit scores while keeping the delinquency rates low and stable.” Average credit scores have been in a long-term uptrend and remain high. The typical mortgagor has a 776 score in Vancouver, 774 in Toronto and 771 in Ottawa-Gatineau. Those are all above the national average, which is around 756.

Delinquency rates—that is, borrowers who are behind on payments by more than 90 days—remained ultra-low in Toronto and Vancouver, at just 0.10% and 0.12%, respectively. That’s less than half the national average.