What rising mortgage rates mean for your HELOC


Borrowers should expect this summer to increase their debt dial

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Canadians like to borrow money. But the days of cheap lending are numbered, with the Bank of Canada aggressively raising interest rates to target inflation.

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And the borrowers most at risk are those with a balance on their home equity lines of credit (HELOC).

Here’s why you might want to prioritize paying off a HELOC — and how you can do it wisely without putting the rest of your finances at risk.

Canadians love their HELOCs

HELOCs allow homeowners to tap into the equity in their home to free up money for other projects, such as investments and renovations.

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As some households reduced their reliance on HELOCs, Statistics Canada noted that there had been an increase in borrowing activity. A February 2022 report showed that Canadians held $168.5 billion in HELOC debt, an increase of $2.3 billion from the previous year.

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But that could soon turn out to be a real liability, experts say. This is because HELOCs are variable rate loans, which means that when the central bank raises its overnight rate, lenders follow suit.

How soon will this have an impact on consumers?

The effect for HELOC holders will be almost instantaneous, says Robert Hogue, senior economist at RBC Economics in Toronto.

For nearly two years, the Bank of Canada chose to keep interest rates near zero, but record inflation rates forced the bank to act earlier this year. In March, it raised its rate by 25 basis points, or 0.25%. The bank then raised the rate another 50 basis points in April.

Its next announcement will be on June 1, and Hogue says economists expect the bank to add another 50 basis points, taking the rate to 1.5% – although it may take some time for the change to have an impact. on consumers’ wallets.

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“In terms of cash flow…for a lot of people, maybe they don’t see that big of a difference,” says Hogue. “It’s just that it will take them longer to pay off their loan.”

But he adds that what should worry borrowers is the cumulative effect of the bank’s plan to raise rates several times before the end of the year.

“We expect the overnight rate to reach 2.5% by the fall,” says Hogue. “At the end of the day, variable rates are up – and quite significantly. Over time, that will definitely make things more difficult for a number of Canadian households.”

What should borrowers do?

Raphael Ambrozewicz, financial advisor and personal financial planner at Vancouver’s BlueShore Financial, says HELOC holders should only worry if they have a large balance on their line of credit or need to make a large purchase soon and that their budget is already tight.

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Ambrozewicz calculated what an increase would mean for consumers. For every $100,000 they owe, a half percent increase will result in an additional $42 per month in interest, or $500 at the end of the year.

“On paper, $42 isn’t much — it depends on the budget,” Ambrozewicz says. “But when you factor in inflation, gas prices, and everything else going up dramatically, $42 a month could be a lot.”

However, Ambrozewicz wouldn’t advise clients to prioritize paying off their HELOC — which he says is still one of the cheapest options for borrowing money — over higher-interest debt. like credit cards.

With the Bank of Canada indicating that there are more hikes to come, the incremental increases could start to weigh on anyone whose budget is already maxed out.

Ambrozewicz recommends planning for double your interest payments. If that makes you sweat, Ambrozewicz and Hogue suggest reaching out to a financial expert for advice.

“If you feel any kind of pinch or stress and you don’t know how to handle it, pick up a phone, come talk to your banker,” says Ambrozewicz. “There is no need to panic.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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