New poll shows 27% of homeowners have a HELOC, and only half of them pay down principal

Home equity lines of credit (HELOCs) used to be a popular way for Canadian homeowners to get access to their home’s equity during a long period of low interest rates and sharply growing real estate prices over the previous 10 years.

Nevertheless, a new poll from Bloomberg brings some more light on the financial risks some household could face amid today’s significant interest rate increases. According to the survey, 27% of respondents have a HELOC, and 78% of them used it. Almost half used it during the previous two years. Those who requested the HELOC from their lender were more likely to use it than those who were offered it (85% vs. 71%).

The report shows 58% of respondents now have an outstanding balance on their HELOC. Most of them borrowed less than $50,000, 10% borrowed $50,000-$100,000, and 10% said they borrowed more than $100,000. 
Larger debts of at least $50,000 were more popular among homeowners aged 55+, which means older Canadians have been using the huge increases they saw in their property’s value.

As you know, the central bank raised its benchmark interest rate by 0.50% on its last meeting amid the largest inflation rate in 30 years (at that point), marking the second half per cent increase in a row. Since the beginning of 2022, the Bank of Canada has raised its key lending rate by 1.25%.

The BoC’s next rate meeting date is July 13, and the market is predicting a 0.75% rate hike, with some economists expecting even a 1% increase. Such a move will raise HELOC payments for variable-rate holders once again.

One of the HELOC’s features is allowing borrowers to make interest-only payments. The poll shows 8% of HELOC holders use this option, another 16% often pay interest-only, and only sometimes pay down the loan. Another 55% of respondents make regular payments in addition to interest willing to reduce their HELOC debt. Meanwhile, 21% of HELOC holders said they either didn’t know their payment structure or preferred not to answer this question.

With the help of HELOC, homeowners can access their home’s equity by borrowing up to 80% of its value combined with a mortgage. On Tuesday, the Office of the Superintendent of Financial Institutions (OSFI) announced future rules changes. At the end of 2023, borrowers will have to pay both principal and interest on any combined loan if its amount exceeds 65% of the property’s value.

Actually, HELOC lenders can require payment in full at any moment, and consumers often have to pay off their HELOC in case they decide to switch their mortgage to another lender. It could be a problem for those who haven’t been saving up to pay down their HELOC in order to cope with interest payments as interest rates grow.

The poll shows the most popular use of a HELOC was home renovation (43%). Debt consolidation takes the second position with 30%, and 13% decided to spend HELOC money on vacation.

The survey of 1,507 Canadians was conducted from June 3 to June 5 by Leger, and 972 respondents (65%) noted they do own a property.