Low interest rates have allowed borrowers to service debt payments, but that could soon change, according to the Canadian Association of Insolvency and Restructuring Professionals.
“Based on our historical data, there seems to be correlation between rise of interest rates and consumer insolvency filings in Canada for consumer proposals and bankruptcies,” said Chantal Gingras, chair of CAIRP. “We surveyed our members and they believe that we will be seeing a rise in consumer filings, but it won’t be immediate.”
Insolvency doesn’t manifest immediately, according to CAIRP. It takes about two years. As mortgages come due for renewal, there will be a decrease in consumer spending and then a subsequent rise in insolvency.
A perilous combination of financial illiteracy and ease of obtaining debt could soon put Canadians—whose debt to income ratio averages 170%—in financial straits.
“Debtors have to hit a wall before they seek help for financial difficulties, and that wall is that they can no longer make their minimum payments,” said Gingras.
Interest rates that rose between 1996 and 2000 contributed to a 22% increase in the annual number of consumer insolvencies filed between 1998 and 2003, according to numbers provided by CAIRP. When rates were hiked again between 2004 and 2006, annual insolvency filings jumped 54% between 2006 and 2009.
Rates have only started rising over the past year and CAIRP expects insolvency filings to commensurately rise through 2019.
However, Ron Butler is dubious that there’s a clear link between interest rate hikes and insolvency filings. He believes unemployment plays a much larger role in insolvency than interest rates.
“Unemployment usually causes that, but not rate increases,” said the head of Butler Mortgage. “Rate increases add stress to household budgets. Renewals in 2018 have been the only time where rates been higher in the last seven years.”
He concedes that, if interest rates hit 7% by 2020, CAIRP’s concerns would have more merit.
“Is it possible? Anything’s possible, but it’s unlikely,” said Butler. “There’s no question that interest rates put pressure on households, particularly when it comes to mortgage renewals. If you can’t get a bigger mortgage you have to put off that future purchase. On the other hand, if you’re paying $680 every two weeks and now you’re paying $780 every two weeks, the money has to come from somewhere and it puts stress on a family, but it doesn’t necessarily mean they’ll go bankrupt nor need consumer proposal.”