When the Bank of Canada announces an increase in its key rate, it immediately affects interest on home equity lines of credit.
If the central bank raises its rate by 50 basis points (0.50%) as expected today, it would be the second hike of such magnitude in seven weeks. And the rise should continue over the next few months.
For those who drag a balance on their margin, is this a disaster?
A popular product
Because there are many!
The home equity line of credit is popular across the country. According to a study by the Financial Consumer Agency of Canada (2019), some three million Canadians had an average of $65,000 in debt on their margin.
On the one hand, banks are quick to offer it with their mortgages. On the other hand, it can be practical, as it allows you to borrow up to 65% of the equity in your home, at generally favorable interest rates, without asking for a loan. funding whenever a need arises. And the terms of repayment are flexible, the only obligation being to pay the interest each month.
Worrying? Amounts borrowed against home equity have been on a slight downward trend since 2013, according to data from the Office of the Superintendent of Financial Institutions (OSFI). With the explosion in the value of real estate, which increases the capacity for margins, one would have expected to see this type of indebtedness continue to expand.
Why now ?
However, we have recently observed a resurgence in the use of mortgage margins.
In February alone, there was a $2 billion jump in borrowing, a statistic that raises eyebrows.
I do not know the reasons for this upsurge, but I risk this hypothesis: I would not be surprised if parents dip into their margins to help their children access property.
How much does it cost ?
We get very angry with the rise in rates, but the truth is that we are still at historical lows.
For the past 10 years, the Bank of Canada’s key rate has fluctuated between 0.50% and 1.75% (the pre-pandemic level). A 0.50% rise today would take us to 1.50%.
The best margin rate is around 4.2%. Going to 4.7%, the monthly interest bill on a balance of $65,000 would go up from $227.50 to $254.58.
With this increase, we are not entering uncharted territory. The main difference with past years is that it is taking place against a background of inflation.
Those who are already suffering from the rising cost of living are likely to suffocate a little more.
What does not change
We repeat it quite often, the home equity line of credit is a great tool, but it can easily turn into a pernicious financial trap.
It should not be used to maintain a lifestyle that we cannot afford. If you regularly pay the balance of your credit card with your margin, less expensive in interest, it may seem clever, but it does not reveal less of a chronic deficit situation.
In this case, you risk never paying for your house.
On the other hand, the margin remains the tool of choice for major work on your home, major contingencies, other real estate purchases, investing (cautiously) and financing some retirement projects.
In all these cases, we must redo our calculations with the increase in interest.
