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In the fall of 2017, news broke that the Bank of Canada was raising its interest rate. Even though borrowers shouldn’t expect another hike this year, the rate seems to have reached a level that could affect a lot of Canadians and their financial situation. The new interest rate is a departure for Canadians who have been enjoying a lower rate for several years now.

How have Canadians responded to the new interest rate and what can they expect in the first two quarters of 2018? What does this rate hike mean for borrowers with a home equity loan or line of credit?

Have Canadians Adjusted? 

Many Canadians saw their mortgage and loans become more expensive overnight, which shrank their cash flow and increased their monthly expenses. Even a half a percentage hike can apply quite a bit of pressure on borrowers.

Based on the changes to the housing market and early reports from the Bank of Canada, Canadians have adjusted well and might have even been prepared for a market adjustment.

The 2018 Interest Rate Outlook

After two rate increase, the remainder of 2017 should stabilize for borrowers, but early 2018 could see another rate increase. The Bank of Canada has been non-committal about what Canadians should be prepared for in 2018, but the door is open for more hikes based on Canada’s strong economic showing and soaring commercial showing.

Do Borrowers Need to Panic or Plan?

Borrowers should stay the course and continue to borrow or pay off debt based on their current financial structure. Saving more money or reviewing monthly expenses is always advisable, but there is no need to panic.

If you weathered the rate hike in September, then you have most likely dealt with the worst of it. 2018 will come with some challenges but there shouldn’t be too many major surprises.

Contact one of Canadalend’s home equity or mortgage experts to learn more about home equity loans or lines of credit or to better understand how the current interest rate would work with your mortgage approval.

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Predicting any housing market is difficult. Predicting Toronto’s housing market requires almost Nostradamus-like abilities.  The Toronto market has held strong for several years now, but the recent dip has led many prognosticators to wage a bet that another spike is looming.

Where will Toronto’s housing market end up a decade from now?

Long-term Growth

There are signs that Toronto will come out of the recent market lull and enter a period of growth that will send housing prices soaring. It might take another year for this to happen, but the market is expected to increase in value. This could create some negative scenarios for those dreaming of homeownership.

Once the demand races beyond the supply and people adjust to new policies and regulations, the market will turn.

Housing Will be Less Affordable

For years, there’s been discussion about Toronto’s housing being unaffordable, especially for young professionals and the middle class.  With the housing market bound to rise in value, there’s a chance that affordable housing will become more challenging.

The condo market should continue to hold strong for the next few years but the housing market should outpace it at some point.

Remember, once the market starts to heat up, there will be a rush to buy including speculators looking to make a buck on an investment. This could speed up the market and inflate it to unsustainable levels.

A Good Time to Enter the Market

Now is a good time to enter the market as prices are relatively low. There are some obstacles—high interest rate, stress test, lack of supply—but if a person can get approved, there’s a window where aggressive bidding could pay off in the future.

A Decade Later

It might seem futile to try to predict the future of a volatile housing market but it’s a worthy exercise. The current state of Toronto’s housing market is temporary and the future will affect tens of thousands of households throughout the GTA.

Researching what will happen in a year or two or ten can help someone make more informed decisions as to when to buy, when to wait and when to invest.

Many Canadians use debt to purchase their homes, start a business or to receive a post-secondary education. The total household debt statistic takes an accumulative approach to see what households owe in relation to disposable income. Trouble can be brewing on a national level when debt greatly outweighs income.

A recent report by the Organization for Economic Co-operation and Development (OECD) claims that Canada’s household debt levels are higher than other countries. This report acts as a warning sign to our national economy. 

OECD’s Report

This economic report frames the current economic situation through the lens of the 2007 credit crisis. A reason for that crisis was the increase in household debt across the board. Since that time, most nations have lowered their debt load, yet for some reason, Canada has not followed this trend. In fact, it’s done the opposite.

At 101%, Canada’s household debt to gross domestic product ratio ranks last. To compare, the U.S’ ratio is 80%. Italy is barely scratching 40%.

Why are Canadians Relying on Debt?

The easy culprit to pin Canada’s debt crisis on is real estate. As housing prices increase in value, Canadians must borrow more to be homeowners. Borrowing doesn’t end with mortgages, though. From heat to furniture to maintenance, Canadians use debt to keep their homes running.

In places like Vancouver and Toronto, thriving housing markets impacts the rental market, forcing many renters to live off debt. As Canada’s population grows, the debt load per household for both homeowners and renters will rise.

Possible Solutions

Household debt is a problem that has surfaced for most western countries. The simple solution (if there is one) is for Canadians to spend more within their means, curbing their reliance on debt. It could be as straightforward as families getting by on one car instead of two, but in fairness, this is always easier said than done.

Measures to protect borrowers and lenders from skyrocketing prices is the most immediate way to reduce debt load. The Government has taken steps through implementing a stress test and a recent interest rate hike by the Bank of Canada could provide some relief.

The data provided by this report should be taken very seriously by Canadians and policy makers. It’s a situation that needs to be monitored and handled before the ratio becomes even more out of whack.

A home equity line of credit (HELOC) is a way for homeowners to gain access to funds by securing their mortgage against the loan or line of credit. By leveraging the equity in your home instead of your credit rating and assets, you can receive more money and a better interest rate.

Here are some tips on getting a good deal on your HELOC.

Shop Around

Often, lenders offer different terms based on an application. This can include different penalties or fluctuating introductory rates. It’s smart to speak with a variety of lenders and institution to get a sense of the different deals and then decide what is best for your financial situation. When you home is being used as collateral, it’s worthwhile to exercise more due diligence.

Once you’ve chosen a lender, be sure to ask about how the rate can change, especially if you are taking advantage of an introductory rate. In addition, inquire as to whether your rate will fluctuate with prime or if it is fixed.

Do you Have Enough Equity? 

Your equity in your home determines the loan or line of credit amount you can receive. It can also influence the interest rate.  The simple formula is comprised of approximately 75% of a home’s value (determined by an appraiser) minus the amount owed. Some lenders will go as high as 80%. Ultimately, this formula ensures that you don’t borrow more than the value of your home.

The less you owe towards a mortgage, the more you can borrow against the value of your home. You might want to wait until you have enough equity.

Spend the Money Wisely 

You want to use a HELOC for very specific reasons like education, medical or home renovations. For those with market savvy or business aspirations, using the money to invest or to start a business is common.

Whatever the money is used for, pay it back immediately. Like any loan or line of credit, this will limit the amount of interest you pay, and can help when applying for this product in the future.

A HELOC is a great way to fund certain aspects of your life or to increase cash flow. Putting more effort into your application and understanding the process will go a long way to making sure you enjoy the benefits of this financial product.