There are two separate interest-rate threats facing the people who have collectively borrowed about $207-billion from the big banks using a home-equity line of credit.
The obvious risk is that the Bank of Canada will continue a process begun last summer of raising its benchmark overnight-lending rate. The central bank has six more opportunities to increase rates this year, including a regularly scheduled rate announcement on Wednesday.
The second risk was revealed recently to some clients of Toronto-Dominion Bank who have home-equity lines of credit (HELOCs). They were told in letters from the bank that, effective June 3, the rate on their credit lines will rise by an average 0.2 of a percentage point or 0.5 of a point, depending on the situation.
Banks were aggressive with rate adjustments such as TD’s as they reacted to the shock of the global financial crisis that began roughly a decade ago. We haven’t seen nearly as much of this type of rate change lately, but TD’s move is a reminder to HELOC holders that banks can act individually on rates, and don’t always follow in lockstep with the Bank of Canada.
A recent Globe and Mail story on the dangers of credit lines said that clients of the Big Six banks had borrowed a record $207-billion using HELOCs as of Oct. 31. TD was the dominant bank in the group – its HELOC balance at Oct. 31 was $73.4-billion.
HELOCs are the smartest way to borrow for expenses you need a little time to pay off. But low interest rates have drawn some people into a dependence on HELOC borrowing to sustain their lifestyle or buy extras they can’t otherwise afford. There’s growing concern about how people will manage all their debts, HELOCs included, as interest rates move higher.
Earlier this week, the insolvency and consulting firm MNP released a quarterly survey in which 43 per cent of participants said they’re feeling the effects of recent rate increases. That’s up five percentage points from three months ago. Almost half of the survey’s participants said they didn’t think they’d be able to cover all their household expenses in the next 12 months without incurring more debt.
TD’s letters to clients do not provide a reason for the bank’s rate increases. Asked for more detail, the bank said the increases apply to a small percentage of customers who have TD home-equity lines of credit. Included here is a number who have a TD HELOC that is secured by a property where there is a mortgage with another lender. That means TD is in “second position” to collect on the debt if there’s a default, behind a competitor.
HELOC rates are set using the lender’s prime rate as a base. A TD sample letter to some of its clients with a HELOC says the rate would rise to prime plus 0.2 per cent from prime. Another letter, to clients with HELOCs on a property where there is a mortgage with a different lender, says the rate will rise to prime plus 1.5 percentage points from prime plus one point. TD’s prime rate as of April 17 was 3.45 per cent.
The bank says the rate increases apply to balances that have not been locked into a specific term with payments mixing principal and interest. HELOCs often allow you to do this if you want to put yourself on a track to have your debt paid off by a certain date. Otherwise, you’re generally required to pay only the interest owing on a HELOC every month.
TD said an interest-rate increase of 0.5 of a point on a HELOC would increase interest costs by 42 cents on $1,000 of outstanding balance. The federal Financial Consumer Agency of Canada reported last year that the average HELOC balance outstanding was $70,000, which means TD’s rate increase would add up to a little over $29 a month, or almost $350 a year.
This increase piles on top of the cumulative rise of 0.75 of a point in the Bank of Canada’s overnight rate since last summer. The level of economic growth these days isn’t strong or consistent enough to suggest a barrage of rate increases through the rest of 2018, but the overall rising-rate trend appears to be holding.
Got a hefty-size HELOC? Start paying it down now, before the Bank of Canada or individual banks start pushing up rates further.
Coming up: Advice from Sheila Walkington, co-founder of Money Coaches Canada, on how to get your HELOC under control.