Aug 31, 2021
Increased use of HELOCs creating 'worrisome' trend: Equifax Canada
Record mortgage volumes push total consumer debt to $2.15 trillion
Record low interest rates are not only driving a big increase in mortgage loans, they’re also fueling a resurgence in Home Equity Lines of Credit (HELOC) - and that could become problematic, according to Equifax Canada.
The credit monitoring and analytics company’s latest consumer credit trends and insights report found the number of new HELOCs jumped 56.7 per cent in the second quarter compared to a year earlier.
“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, assistant vice-president of advanced analytics at Equifax Canada, in a press release Tuesday.
She’s concerned if interest rates rise sooner than expected, many homeowners could find themselves in financial trouble.
Bank of Canada Governor Tiff Macklem has repeatedly stated the recent jump in inflation will be temporary but has also indicated interest rates could rise by the end of next year.
“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 said.
“In 2018 when interest rates went up, we saw a drop in credit card payments, especially among consumers with a HELOC. It also led to higher bankruptcies among older consumers with HELOCs,” she added.
Along with HELOCs, Equifax Canada reported that new mortgage loans soared 60.2 per cent year-over-year in the second quarter, led by homeowners in British Columbia. It’s the biggest jump ever recorded for a single quarter, and was the main driver as total Canadian consumer debt hit $2.15 trillion in the second quarter, a three per cent increase from the prior quarter .
Mortgages have been a main driver of rising household debt, with data from Statistics Canada showing the total value of mortgages rose 1.2 per cent in June to $1.73 trillion – the fastest increase since 2007.
Equifax found 90-day delinquency rates fell in the second quarter for mortgage and non-mortgage loans, down by 32.6 per cent and 28.6 per cent respectively, thanks to government income support and increased disposable income, but flagged an uptick in insolvencies.
“Lower delinquencies are a good thing, however, insolvency volumes are higher this quarter than the lows of last year,” said Oakes. “We may see surprise insolvencies occur where consumers with no delinquency history on file and a decent credit score end up filing without warning.”
“We’ll continue to monitor how increases in inflation and decreases in government incentives impact consumer debt levels and insolvencies over the coming months,” she said.