Rising rates, prices fuel home equity credit worries

TORONTO Rising interest rates and efforts by policy-makers and regulators to tame climbing residential real estate prices are prompting concerns about the ability of Canadians to manage popular and widespread home equity lines of credit.

Research conducted by the Financial Consumer Agency of Canada suggests plans to pay off the loans, which make up a significant portion of nonmortgage consumer debt, are optimistic.

New public opinion research confirmed the consumer agency’s earlier findings, which revealed one-quarter of the HELOC holders have been paying only the interest on these loans most months. That means they haven’t been paying down the principal on this debt, which will be subject to the higher rising interest rates. “We have already identified a pressing need for us to help Canadians realize that not using HELOCS responsibly can have serious repercussions on their financial well-being,” FCAC Commissioner Lucie Tedesco warned in a recent speech to mortgage professionals in Montreal.

Just over 60 per cent of those surveyed by the FCAC who were paying only interest said they planned to pay off their lines of credit over the next five years, but Tedesco suggested that was “overly optimistic,” particularly given that the average Canadian HELOC balance is $70,000.

Jason Mercer, a vice-president and senior analyst at Moody’s Investors Service, said higher debt-servicing costs driven by rising interest rates are a concern. “If the consumer is barely making regular payments today, they will likely not be able to keep up with higher monthly payments — unless they pay down more of the HELOC,” said Mercer, who tracks mortgage and related debt for the credit-rating agency.

This concern is separate from more hypothetical risk factors around HELOCS, such as rising unemployment levels and falling house prices, he said.

The FCAC isn’t the only market watchdog to sound the alarm on the HELOC, which has grown in popularity amid prolonged low interest rates and soaring house prices that provided the equity to back larger loans.

Bank of Canada governor Stephen Poloz included concerns about how Canadians were using their HELOCS in a speech last December about things that keep him up at night.