Have a mortgage? If so, you may be affected by the Bank of Canada’s recently announced rise in lending rates.
CBC reports that though the increase only marginally moves the dial from a 0.50% rate to one that sits at 0.75%, at least one category of homeowner stands to be significantly impacted: those with home equity lines of credit (HELOCs).
HELOCS a popular lending option
The average Canadian homeowner with a HELOC loan carries a balance of $70,000. Currently, there are approximately three million active HELOCs. However, unlike typical mortgages, these loans don’t require a regular payment. As long as the interest gets paid, the loan can stand. And, unfortunately, about 40% of HELOC consumers choose to not make regular payments against the principal on their loans. This leaves them vulnerable as rates rise.
The hidden risks
HELOCs are typically set at variable rates, meaning that those who carry this type of loan are pretty much guaranteed to see their interest payments elevated as the Bank of Canada raises its own rates. In addition, many HELOCs have no restrictions on how quickly their rates can rise, nor is there any obligation on the part of the lender to give consumers a warning as to when they’ll raise their rates.
Some types of HELOCs are “demand loans.” This means consumers who have them could potentially be required to pay back the entirety of the loan—at any time the lender chooses.
Despite the potential risks, HELOCs are tempting. While they can be a good option in some circumstances, too often consumers use them as a way to pay for luxury items they don’t really need. In some cases, homeowners use the funds to pay for renovations, believing they’re making an investment that will ultimately increase the value of their home. This may prove to be true in some cases, but it really depends on what’s been renovated and how the upgrade fits in with the prevailing standard of the neighbourhood.
A rising amount of debt
According to the Financial Post, nearly half of all Canadians live paycheque to paycheque, and total consumer debt in our nation increases every single year. At the end of 2016, the CBC reported that consumers owed a combined amount of approximately $1.7 trillion. So if you’re in debt and need help, you’re certainly not alone.
The debt help you need
Meeting with a Licensed Insolvency Trustee may be the best way to get a handle on your financial situation. In the GTA, and throughout Southern Ontario, Harris & Partners Inc. is available to help. Contact us now to find out more, or schedule an appointment with one of our Licensed Insolvency Trustees today.