Tag Archives: HELOC

What the latest rate hike means for you

Those with mortgages will feel the hike the most

The Bank of Canada is hiking its benchmark interest rate by a quarter point to one per cent. So, what does that mean for people with credit card debt or a mortgage?

Economist Bryan Yu with Central 1 Credit Union says if you’re carrying a lot of debt on your credit card, you’ll probably start to notice higher interest charges.

“They’re going to be facing the quarter-point increase on terms of that debt for their servicing… That’s a quarter point on an annual basis. So, it is going to be a bit of a pinch going forward.”

“Likely, we are going to see a couple more hikes going forward,” he speculates. “But I think at this point, it will be relatively stable for most individuals until about next year.”

So, it might be a good time to start chipping away at that balance.

“They should keep in mind that this is sort of the early stages of a longer-term rate cycle. So, they may want to be looking at paring back some of that debt over time,” says Yu.

“When it comes to credit card debt, it’s a normally high cost debt, unlike mortgages, which is relatively cheap money. So you don’t really want to be holding on to that type of a debt going forward because of the high cost associated with it. So, if you are looking at paying off any debts whatsoever, it should be those high-cost loans.”

Effect on mortgages

For those with a mortgage, Economist Tsur Somerville with UBC explains who’ll feel this rate hike the most:

“If you have an adjustable rate mortgage, then your mortgage payments will be going up very, very soon. And if you’re on a fixed rate mortgage, it means that when you renew, you’re going to be looking at higher payments then.”

Somerville says while the Bank of Canada hiking its trendsetting rate won’t alone make a huge impact, it’s part of a process that is increasing the cost to borrowers, which could dampen the real estate market.

 

“You start seeing increases in what people will have to pay on their mortgages. That affects pricing and affects demand.”

He adds first-time buyers will be most affected. “Those are the people who are entering mortgages; they’re not carrying an existing mortgage. So, we would expect those to be the people who all of a sudden are looking at qualifying for a smaller mortgage and having higher payments on a mortgage than the existing amount.”

This is the second time this year that the Bank of Canada has moved the benchmark higher.

“I think if we get a third and fourth hike, I think that a kind of accumulated pattern that starts to have an effect on people,” says Somerville. “Any one-off effect, the amount and payment is relatively small and you can sort of brush it all off. But when they start piling up, [it starts] making a difference.”

Source: MoneySense.ca –  Martin MacMahon and Denise Wong, News 1130

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Why consumers should be wary of using the wildly popular home equity lines of credit as ATMs

A federal agency is warning consumers addicted to home equity lines of credit — a product increasingly driving debt —  could find themselves at increased risk of default if the housing market corrects.

“Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending, which could in turn negatively affect the economy,” the Financial Consumer Agency of Canada wrote in a 15-page report out Wednesday. “Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”

The timing of the release from FCAC is coincidental but it comes just two days after the Toronto Real Estate Board reported new data that clearly show the housing market in retreat. May sales dropped 20.3 per cent from a year ago and prices were off 6.2 per cent from April amid a massive surge of active listings.

The report, titled Home Equity Lines of Credit: Market Trends and Consumer Issues, focuses on the massive explosion of the HELOC market which grew from about $35 billion in 2000 to $186 billion by 2010 for an average annual growth rate of 20 per cent.

During that period, HELOC became the fastest growing segment of non-mortgage consumer debt. In 2000, the HELOC market made up just 10 per cent of non-mortgage consumer debt but had climbed to 40 per cent by 2010.

“At a time when consumers are carrying record amounts of debt, the persistence of HELOC debt may add stress to the financial well-being of Canadian households. HELOCs may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford,” said Lucie Tedesco, commissioner of the FCAC. “Consumers carrying high levels of debt are more vulnerable to the impact of an unforeseen event or economic shock.”

The average annual growth of the HELOC market slowed to five per cent from 2011 to 2013 and has averaged two per cent since, the slowdown at least partially attributable to tougher federal guidelines on how much home equity consumers can access through a HELOC.

HELOC products have become popular because they work like credit cards or unsecured lines of credit, in terms of the ability to draw money from them. They are usually backed by a collateral charge on your home but a HELOC most often gives the consumer the ability to withdraw and pay off their HELOC with flexibility — financed at a rate which is usually close to the prime lending rate at most banks.

Unlike a mortgage, a HELOC is a demand loan, and while most borrowers can pay interest-only on them, the loans are callable by the bank at any moment — a practice rarely seen in the Canadian market at this time.

A positive feature of a HELOC is the ability to consolidate high-interest debt from items like credit cards, and the report says from 1999-2010, 26 per cent of loans were used for just that. Another 34 per cent were used for financial and non-financial investment. The remaining 40 per cent was used for consumption or home renovation — a market Altus Group said was worth $71.4 billion in 2016.

The federal agency noted that most HELOC products sold today are part of what is called readvanceable mortgage. In those cases a HELOC is combined with the mortgage and as the mortgage is paid down, the available credit in  HELOC increases.

“In recent years, lenders have been strongly encouraging consumers to use readvanceable mortgages to finance their new homes,” said Tedesco.

She said complaints have shown people are not understanding the product. “It’s not that they’ve been bamboozled,” said Tedesco. “One of the things that we will be doing with the results of our research is trying to see how we can improve the disclosure around readvanceable mortgages, and will communicate to the financial institutions our expectations on that front.”

Source: Financial Post – Garry Marr | June 7, 2017

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