Low-rate HELOCs can give false sense of financial wellbeing

Canadians are being urged to keep a lid on their spending rather than go on a ‘sun and fun’ spending spree.

With inflation still not under control and interest rates potentially rising again before they fall back, the Credit Counselling Society (CCS) says that using the summertime as an excuse to binge may lead to frustration and regret in the fall.

The non-profit is particularly concerned about the rise in mortgages with a longer amortization period – by the end of 2022, 46% of new mortgages had periods longer than 25 years according to the Bank of Canada, up from 34% in 2019.

Peta Wales, president & CEO of the CCS says that the lower monthly mortgage payments provided by longer amortization periods should not be taken as an opportunity to rely on home equity lines of credit (HELOCs) to make ends meet.

“This unfortunately gives consumers a false sense of their financial wellbeing," she said. "It is concerning, because while helping homeowners get by, this short-term solution comes at a longer-term cost."

Reliance on credit will mean households find it harder to manage further interest rate hikes, inflation, and effects on their budget from financial uncertainty.

There is also the risk of a downturn in the housing market, which would leave heavily leveraged homeowners highly vulnerable.

"It is crucial that all Canadians, but homeowners in particular, take stock of where they're at financially and challenge themselves not to normalize debt," added Wales. "No one knows when rates will come down, but it's unrealistic to expect they will hit rock-bottom any time soon. Work with interest rates realistic in today's environment to come up with a plan to deal with your debt." 

Delinquency risk

Rising debt levels are already creating higher rates of delinquency for non-mortgage debt, but pushing credit lines to the limit means homeowners may end up with no choice but to default on home loan payments.

"We find that most people do their best to keep up with their housing payment, either their rent or mortgage," notes Isaiah Chan, VP of Programs & Services at CCS. "If someone starts missing other payments and tries to juggle which bill to pay and which to skip for another month, those are warning signs they shouldn't ignore. It won't be long before they can't keep up with their housing expenses, which is highly stressful and can cause things to spiral out of control quickly.”