For many Canadians, HELOCs have been a convenient vehicle to obtain financing for various purposes, such as home renovation. Debt consolidation is another popular use for the products, with 30% of respondents saying they use HELOCs for debt consolidation because of their relatively lower interest rates compared to other consumer debt products.
HELOC holders are bracing themselves for higher payments as the Bank of Canada is widely expected to raise its policy rate by 75 basis points this week, and possibly take it beyond its neutral 2% to 3% range before the year ends. For a household with a HELOC of $65,000 at 3.7%, interest-only monthly payments would amount to $200 per month; a 75-basis point increase would have that same household see an additional $41 per month on their monthly interest payments.
If the central bank announces a 100-basis point increase, that same household would see a monthly HELOC payment increase of $55 to $255.
However, Shmuel says the five-year Canada bond yield has come down rapidly within the last several weeks, after peaking at 3.5% in the middle of June. The yield on the five-year U.S. Treasury has likewise slipped below 3%.
“There’s been a drastic decrease in bond yields over the past few weeks because recession risks have been heightened,” Shmuel says. “Over the last few weeks, we’ve been getting data from the Eurozone, the U.S., and Canada that portend potentially bad economic outcomes, so there’s heightened fear right now.”
