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Does a lack of bankruptcies in Canada mean the Canadian consumer is doing better than most experts think? Much like the lack of mortgage defaults, the devil’s in the details. The debt experts at Hoyes Michalos have created the Homeowners Bankruptcy Index, which is currently at an all-time low.
At first glance, this looks great. However, Hoyes Michalos claims there is an artificially low number of bankruptcies due to homeowners refinancing their debt, and just slapping it onto their mortgages.
The Homeowner Bankruptcy Index
If you’re not a debt expert, you might need a little walkthrough of the explanation of the Homeowner Debt Bankruptcy Index. In their words, it measures the percentage of insolvent debtors who owned a home at the time they filed a bankruptcy or consumer proposal.
That was pretty chock full of industry lingo, so let’s just give you a quick walkthrough of the terms so we’re on the same page.
In plain English, insolvent debtors are people that can’t keep up with their bills. A consumer proposal is a formal attempt to negotiate paying a percentage of your debt. Bankruptcy is when you turn your pockets inside out and shrug like the Monopoly Man when he gets the “Pay The Poor” card. Just kidding, it’s a formal process where a Licensed Insolvency Trustee (LIT) liquidates your assets and distribute them to your creditors. There’s a little more to each of those, but hopefully you never have to actually find out the full ins and outs of them. Got it? Onward!
Homeowner Bankruptcy Index at all-time lows
The Homeowner Bankruptcy Index is currently at an all-time low. The number of people filing for either a consumer proposal or bankruptcy that owned a home fell to just 7% at the end of May 2017.
This is a pretty big drop from the all-time high, when it hit 35% in February 2011. If you look at the chart, you’ll notice that it drops very rapidly in 2016, and 2017. This was right when home prices across Canada started soaring.
Better DwellingDecline is due to rise in home prices
Hoyes Michalos has a very simple explanation for that, Canadians are using their homes like ATMs, withdrawing equity. “Homeowners with significant unsecured debt are currently able to refinance this debt through a second mortgage or home equity line of credit (HELOC)” claims Hoyes Michalos.
There’s 1.91 million Canadians with HELOCs, and even more with a second mortgage. Not exactly signs of booming incomes that would be the ideal reason to see delinquencies decline.
They warn that any softening of the market that results in a correction of home values will result in a sudden spike in homeowners filing for insolvency. They go on to warn if this combines with “even a modest rise in interest rates…we could see this index rise above levels experienced after the 2009 recession.”
Canadians have been piling on record amounts of debt, and it appears they’re looking for every possible way to delay paying it back. Refinancing your mortgage to accommodate debt might work for now, but will leave homeowners that take this option more vulnerable.
The less equity in your home, the less likely you are to secure good mortgage rate renewal terms. Worse terms mean higher rates, and that will definitely complicate your ability to pay your bills on time.
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