For years, the number of Canadians defaulting on their loans has remained steady, even as household debt climbed higher. But don’t count on that to last much longer, says a new report by the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).
The study, which analyzed 20 years of data from the Office of the Superintendent of Bankruptcy Canada (OSB), found that there is usually a two-year lag between when interest rates start to rise and when consumer insolvency filings begin to increase.
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The streak of interest rate hikes that occurred between 1996 and 2000, for example, was followed by a 22 per cent spike in the number of Canadians who filed either a consumer proposal or declared personal bankruptcy every year between 1998 and 2003. Similarly, the interest rate increases from 2004 to 2006 were followed by a 54 per cent jump in annual insolvency filings between 2006 and 2009.
That’s why CAIRP expects to more Canadians resorting to debt restructuring starting in 2019. The middle of next year will mark two years since the Bank of Canada started lifting its trend-setting policy interest rate. Since June 2017, rates have increased from 0.5 per cent to 1.75 per cent, and economists expect more hikes.
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The association, which represents nearly 1,500 licensed insolvency trustees and associates across the country, found in a survey that more than 70 per cent of its members expect to see insolvency filings rise over the next five years.
“For more than a year, the issue of high consumer debt and rising interest rates have been a growing concern but they haven’t been reflected yet in the number of consumer insolvency filings,” said Chantal Gingras, chair of CAIRP, in a statement. “That’s due to the insolvency time lag that occurs between the point trouble begins and the point at which overextended individuals are forced to begin the debt resolution process.”
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Gingras said that’s because, in an environment where credit it easily accessible, a common response to higher interest rates is simply to borrow more — be it a higher line of credit borrowing limit, a new credit card, or payday loans.
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In addition to those more traditional borrowing options, more Canadians may now be turning to private lenders to be able to add debt to their existing mortgage.
For example, a recent report by Toronto brokerage Realosophy Realty and land registry company Teranet found a significant increase in the share of consumers turning to private lenders for mortgage refinancings in the Greater Toronto Area (GTA). Notably, the sharpest increase in mortgage transactions done through private lenders was for refinancing, which involves replacing an existing mortgage loan with a new, and usually larger, one.
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Mortgage brokers say private lenders can play a useful role, for example, by providing short-term emergency funding that can help homeowners stave off a foreclosure. But the question remains of whether the more recent increase in private lending for mortgage refinancing simply reflects a final kick at the can for homeowners who will eventually face an inevitable financial reckoning.
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How sharp the increase in insolvency filings will be may depend on the health of the Canadian economy, data shown in the CAIRP study suggests.
The 54 per cent rise in bankruptcies that followed the 2004-2006 rate increases, for example, overlapped with a sharp rise in unemployment during the 2008-2009 financial crisis.
It usually takes a financial shock, such as a health issues, divorce or a major unexpected expense to push borrowers teetering on the verge of bankruptcy over the edge, debt experts often note.
A rise in joblessness could provide that catalyst moment for many Canadians across the country.
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“Unfortunately, only a small portion of people who have difficulty keeping up with bills and payments seek professional help. Those who do, too often wait until they are in a dire situation,” Gingras said. Instead, she added, “it’s important to recognize the scale of the problem early and take action right away.”
A number of options are available to Canadians who struggle with their debt repayments, from consolidating payments and renegotiating interest through a debt management plan; through filing a consumer proposal; or declaring bankruptcy.
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