Debt Relief Experts
Owning a home and carrying a mortgage, particularly a high ratio mortgage, is a financial risk. But does owning a home increase, or decrease, the likelihood that someone will file insolvency in Canada?
Homeowners in Bankruptcy Data
To help answer this question, Hoyes Michalos has created the Homeowners Bankruptcy Index (HBI). An extension of our Joe Debtor bankruptcy study, this monthly index measures the percentage of insolvent debtors in our study who owned a home at the time they filed a bankruptcy or consumer proposal.
The Hoyes Michalos Homeowners Bankruptcy Index is currently at historical lows. The dramatic decline in the percentage of homeowners filing insolvency is not because homeowners no longer carry credit card debt. Rather, the drop in our HBI reflects a rise in home prices since insolvent homeowners purchased their homes and the resulting increase in their home equity. Homeowners with significant unsecured debt have been able to refinance this debt through a second mortgage or home equity line of credit.
This trend will change as a result of the economic impact of COVID-19. Homeowners with high consumer debt may no longer qualify for second mortgages. Private lenders will exit the market as a risk management strategy, and many private lenders may find themselves in financial difficulties. We expect high-risk mortgage lending to tighten significantly in the coming months. As a result, we anticipate a rise in homeowner insolvencies in the latter part of 2020. If housing prices fall, the growth in homeowner insolvencies will accelerate even more.
Source: Hoyes, Michalos & Associates Inc.
Homeowners filing insolvency in Canada are not necessarily delinquent on their mortgages. The problem is the amount of unsecured debt they carry on top of their mortgage. According to our most recent bankruptcy study, the average insolvent homeowner owes an additional $72,510 in unsecured debt on top of his mortgage debt.
There are four fundamental factors that increase the risk of insolvency for homeowners:
- rising interest rates,
- falling home values,
- credit tightening, and
- rising unemployment.
Should the real estate market soften, and home values decline, we are likely to see a rise in the rate of homeowners filing insolvency. Combine this with an increase in interest rates, and we could see this index rise above levels experienced after the 2009 recession.
Insolvent homeowners in Ontario are able to keep the equity in their home if they file bankruptcy as long as that equity is under $10,000. For homeowners unable to refinance all of their debts through a second mortgage, a consumer proposal is a viable alternative to bankruptcy.
For additional commentary or to obtain a CSV file of our homeowner-bankruptcy data, contact:
J. Douglas Hoyes
CA, CPA, Licensed Insolvency Trustee
Email Doug
Ted Michalos
CA, CPA, Licensed Insolvency Trustee
Email Ted
