Increased HELOC use could lead to higher insolvencies: Equifax

Overall consumer debt now stands at $2.15 trillion

High mortgage growth and low interest rates have resulted in greater uptake for home equity lines of credit (HELOC) — which could be problematic, warns Equifax Canada.

The credit monitoring company’s most recent consumer trend report found new HELOC volume increased by 56.7% in Q2 when compared to the same quarter in 2020. Volume is at its highest in a decade.

“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, AVP of Advanced Analytics with Equifax Canada, in a Tuesday release.

Driven by considerable mortgage growth, overall consumer debt hit $2.15 trillion, up 3% from last quarter and 7.5% from Q2 2020. New mortgage volume hit over 410,000, up 60.2% from the same period last year and the highest-ever volume increase in a single quarter.

According to Oakes, another concerning trend is the amount of mortgage debt being taken by consumers with lower credit scores. While these consumers only amount to 10% of all new mortgages, due to soaring home prices their average loan amount has increased at the same rate as consumers with higher credit scores.

Inflation hit 3.7% in July, the largest yearly increase in a decade. Oakes said inflation levels add to her concerns.

“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,” Oakes said.