Record low-interest rates, coupled with high mortgage growth, are fuelling a Home Equity Line of Credit (HELOC) rebound -- a trend that may be a cause for concern.
During the second quarter of 2021, new HELOC volume increased by 56.7% compared to Q2-2020 -- marking the highest it has been in the last ten years, according to Equifax Canada's most recent consumer credit trends and insights report.
“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, AVP of Advanced Analytics at Equifax Canada. “In 2018, when interest rates went up, we saw a drop in credit card payments, especially among consumers with a HELOC. It also led to higher bankruptcies among older consumers with HELOCs.”
Oakes said she is also worried about the mortgage debt being taken on by consumers with lower credit scores.
READ: Canadians Paid Off Record Amount of Non-Mortgage Debt During First Year of COVID
"These consumers form a small percentage of all new mortgages (10%), but their average loan amount has increased at the same rate as consumers with higher credit scores. With uncertain times due to the pandemic still ahead, these consumers could find themselves less equipped to manage future additional financial stress," said Oakes.
Further adding to the concern is the rate of inflation, which hit 3.7% in July, the largest yearly increase in a decade. Bank of Canada Governor Tiff Macklem has said the jump in inflation will be temporary, but he has also said interest rates could rise by the end of 2022.
“Prices for consumer goods have risen and if the inflation trend continues, there is potential for an earlier-than-planned interest rate increase to curb this,” said Oakes. “With many consumers now heavily leveraged and the potential for increases on variable rate mortgage and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise. This can lead to higher insolvencies.”
But it's not only HELOCs that are experiencing steady increases, Equifax Canada said new mortgage volumes climbed to over 410,00 in Q2-2021 -- led by homeowners in BC -- marking a 60.2% year-over-year increase, marking the highest volume ever recorded in a single quarter.
New mortgage loans were the main driver of increasing total Canadian consumer debt, which hit $2.15 trillion in the second quarter, a 3% increase from the prior quarter and up 7.5% from Q2-2020.
Equifax Canada also said soaring home prices have helped increase the average loan amount for new mortgages to over $355,000, a 22.2% year-over-year increase.
The report also revealed that 90-day delinquency rates --the percentage of loans within a financial institution's loan portfolio whose payments are delinquent -- fell in the second quarter for mortgage and non-mortgage loans, down 32.6% and 28.6%, respectively, thanks to government support programs and increased disposable income helping consumers pay off their debts and improve their credit score.
However, the drop in delinquencies signalled an increase in insolvencies during the quarter.
“Lower delinquencies are a good thing, however, insolvency volumes are higher this quarter than the lows of last year,” said Oakes. “We may see surprise insolvencies occur where consumers with no delinquency history on file and a decent credit score end up filing without warning.”
Oakes added that Equifax would continue to monitor how increases in inflation and decreases in government incentives impact consumer debt levels and insolvencies over the coming months.
