'The government is forcing people into products instead of paying down their debt'

In spite of B-20, HELOCs are on the rise and Canadians are still overleveraging themselves

'The government is forcing people into products instead of paying down their debt'

Interest rates aren’t the only things going up—HELOCs are too, and paying the piper could be sooner than most expect.

Canadians are taking out home lines of credit at the highest rate since 2012, and Mortgageoutlet.ca Principal Broker Shawn Stillman says that’s a consequence of OSFI’s penultimate B-20 update in October 2016.

“It doesn’t make sense to break the mortgage that predates the October 2016 rule change; it makes sense to keep that mortgage in place and add something else on top,” he said. “It could be their reckoning because they may have to pay the piper for taking on this debt and not paying back the debt. Where it becomes difficult is where you have to pay the principal and the interest.”

Making matters particularly perilous for people burdened with HELOCs is that the variable interest rate went up last month and is still expected to climb.

“I think it will be one of those things where people are kicking the can down the road, so when it comes time for people to renew their mortgage or roll their line of credit into a mortgage, they’ll be hit with a higher interest rate because their mortgages will be non-insurable or insured, and they’ll get hit with a rate shock,” said Stillman.

“People keep taking on debt because they don’t have a choice, and they’re choosing products they’re not amortizing, so they’re not paying down that debt, and it will eventually catch up to them at some point in time. They’ll have to pay more interest because rates will be higher, so they may simply not pay off their mortgage and sell the house. “

Stillman says HELOCs are perfectly reasonable if somebody is using the money to, say, renovate their homes and increase its value. However, most people take on HELOCs out of necessity and Stillman doesn’t expect their prevalence to diminish, even with rising interest rates.

“The government is forcing people into products instead of paying down their debt. They take out the debt and keep on borrowing.”

Kim Gibbons, mortgage broker with Mortgage Intelligence, noticed the same uptick in HELOCs in October 2016, and says people were both trying to maximize the equity accrued in their homes and feared a downturn in the market, especially when news broke of OSFI’s stipulations.

“I think that was just an offshoot of the rules coming down and people wanting to take advantage of the market being higher and properties being valued higher so they could get maximum lines of credit, just in case,” she said. “A lot of my clients are leaving them on advance just as a safety net, but I think it’s a by product of the rules coming down.”

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