Canadians have more debt than ever, but fewer are going bankrupt. Why?

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The Bank of Canada is warning that Canadians and the country's financial systems are more vulnerable to changing economic circumstances. As Shirlee Engel explains, it's because Canadian families are going deeper into debt while the housing market is still hot – Jun 8, 2017

Canadians keep racking up debt, but fewer of them are defaulting on their loans, according to a new report.

Non-mortgage debt grew by nearly two per cent during the 12-month period ending in March 2017, while the delinquency rate dropped by 1.5 per cent, credit report company TransUnion said Thursday.

Canadians now owe over $21,000 on average, in addition to any mortgage debt, but only 2.7 per cent of borrowers’ accounts are delinquent.

READ MORE: Over half of Canadians are $200 or less away from not being able to pay bills

Unsurprisingly, Calgary, Edmonton and Regina bucked the trend. In these cities stricken by the recent oil price shock, debt balances are shrinking or barely expanding and delinquency rates are growing faster than the national average.

In Montreal and Ottawa, it’s a different story. Both cities saw delinquency rates drop by more than two per cent, even as debt levels grew.

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In Vancouver, consumer debt has grown by more than four per cent — the highest rate of any major city in Canada — but delinquencies inched up less than two per cent.

But nowhere are the numbers as staggering as in Toronto, where debt went up three per cent and delinquencies plunged by more than seven per cent.

What’s going on?

Thank the housing market

A strong economy and low unemployment are probably part of the reason why Torontonians and Ontarians who are swimming in debt can stay afloat.

But possibly an even bigger reason is skyrocketing housing prices, according to Douglas Hoyes and Ted Michalos of Hoyes Michalos and Associates, an Ontario-based debt-management firm.

“Homeowners with significant unsecured debt are currently able to refinance this debt through a second mortgage or home equity line of credit,” the two wrote in a recent report.

READ MORE: Indebted Canadians using ‘homes as ATMs,’ consumer agency warns

Higher property prices automatically grow homeowners’ equity stake, which is the market value of the house minus any outstanding mortgage liabilities. When home equity goes up, so does homeowners’ ability to borrow against their home, for example through a home equity loan (HELOC). Consumers can then, say, use a large HELOC loan to pay off multiple smaller credit card debts, which carry much higher interest rates than HELOCs.

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READ MORE: Home renovations: The 4 big risks of borrowing against your house to pay for it

This may explain why Ontario homeowners who filed for bankruptcy or debt renegotiation have 72 per cent more credit card debt and 79 per cent more personal loan debt than insolvent borrowers who do not own a house, as a recent survey by Hoyes Michalos shows.

The average insolvent homeowner had non-mortgage debt of $72,510, compared to $52,634 for non-homeowners.

In Canada, the average non-mortgage debt load stands at $21,696, according to TransUnion.

WATCH: Rising debt, sizzling housing markets leave Canada more vulnerable

Click to play video 'Rising debt, sizzling housing markets leave Canada more vulnerable' Rising debt, sizzling housing markets leave Canada more vulnerable
Rising debt, sizzling housing markets leave Canada more vulnerable – Jun 8, 2017

Homeowners’ debt binge could soon come to and end

There are four things that could spoil homeowners’ debt party, according to Hoyes and Michalos:

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  • falling home prices,
  • rising interest rates,
  • creditors imposing tighter conditions to obtain loans
  • rising unemployment

Declining property values will shrink the amount homeowners can borrow against their homes, but they might also leave some owing more in mortgage and HELOCs than their homes are worth. This means they wouldn’t be able to settle their debts by selling the house.

While few economists see an impending risk of a housing downturn in Canada, home prices in Toronto dropped in May compared to April, after the Ontario government introduced a slew of measures aimed at cooling the real estate market.

READ MORE: Toronto could become a ‘buyer’s market’ in coming months: RBC

WATCH: Home sales in GTA drop in May after foreign buyer’s tax introduced

Click to play video 'Home sales in GTA drop in May after foreign buyer’s tax introduced' Home sales in GTA drop in May after foreign buyer’s tax introduced
Home sales in GTA drop in May after foreign buyer’s tax introduced – Jun 5, 2017

An interest rate increase is an even bigger near-term risk, as the Bank of Canada is widely expected to hike rates sometime next year.

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A rise in interest rates would make several kinds of debt more expensive. While most mortgages carried a fixed rate that changes only at renewal, the interest rate on many HELOCs and credit cards fluctuates along with the general level of interest rates in the economy.

READ MORE: Rising interest rates could cost the average Canadian $130 a month more in debt repayments

“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 even a modest rise in interest rates, and we could see this index rise above levels experienced after the 2009 recession,” Hoyes and Michalos wrote.