High risk mortgage insolvencies decline slightly

The dream of homeownership can quickly turn into a nightmare when finances take a turn for the worse. This is particularly true for homeowners carrying a high-ratio mortgage. A recent study by our firm showed that one in four Canadians own a home at the time they file for insolvency. The sad truth is that the vast majority of these homeowners are heavily indebted with both mortgage debt and credit card debt. In fact, with an average mortgage of $197,137, their home was 90 percent encumbered at the time of their insolvency. At the same time, they owed on average $68,045 in other unsecured debt including bank loans, credit card debt, payday loans, and taxes.

There is, however, some good news in these numbers since our last study two years ago. The rate of homeowners declaring insolvency fell from 29 percent of all insolvencies to 24 percent. In addition, the average mortgage ratio fell from 92 percent to 90 percent. The percentage of insolvent homeowners with less than 10 percent equity in their home fell sharply from 70 percent of all insolvent homeowners to just 59 percent.

There are several reasons why it appears Canadians are handling their mortgage debt better than in our previous study:

  • Individual consumers may be taking advantage of low interest rates to pay down their overall mortgage debt, reducing their risk of bankruptcy in the first place.
  • Home prices have increased over the past two years in many markets.
  • The average age of a homeowner in our study was 46, compared to 44 two years ago, and so he or she has had more time to pay down their mortgage, again increasing their home equity.

A more significant factor in the drop in high-ratio mortgage indebtedness for insolvent debtors is the attractiveness and increased awareness of consumer proposals as an alternative to bankruptcy. More than three in four insolvent homeowners in our study chose to file a consumer proposal over filing bankruptcy.

A consumer proposal allows deeply indebted individuals to tap into the equity in their home to make a settlement proposal to their creditors. It is better than a home-equity consolidation loan for an insolvent debtor in that it reduces their overall unsecured debt rather than just transferring debts (like credit card debt) from an unsecured debt to a secured loan. For this reason, homeowners with a higher equity value in their home are turning to a consumer proposal as a way to deal with their high unsecured debt. In fact, for those insolvent homeowners with some equity in their home, 93 percent filed a consumer proposal.

Some other findings from our study:

  • Insolvent homeowners were more likely to be married (64 percent versus 40 percent for the average insolvent debtor) with an average family size of 2.8.
  • Credit card debt accounted for 43 percent of their overall unsecured debt, compared to 37 percent for the average debtor.
  • Almost half of all insolvent homeowners had some equity in their home.
  • Forty-three percent list job loss or income reduction as the primary cause of their financial problems.

While this represents some good news for homeowners, we continue to advise homeowners with significant unsecured debt to take advantage of low interest rates and high real estate values to either refinance or consider a consumer proposal, so that they are well positioned in the event that interest rates rise and real estate values soften. Those entering the market should carefully consider how affordable their high ratio mortgage will be to ensure they too don’t rack up credit card debt trying to stay afloat, as it is clearly the combined effect that still leads to insolvency.

Doug Hoyes is a licensed Bankruptcy Trustee and Chartered Professional Accountant (CPA) and co-founder of Hoyes, Michalos & Associates. Doug has extensive experience helping Canadians manage their debt and has appeared as an expert in the media and with the Canadian senate on personal insolvency matters.

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