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 Homeowner’s Bankruptcy Index (HBI). An extension of our Joe Debtor 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 Homeowner’s Bankruptcy Index jumped dramatically in September 2017 to 10.2%, the highest level we’ve seen since February 2017.  This directly correlates with the recent drop in housing prices across Ontario. Homeowners carrying consumer debt, on top of significant mortgage debt, are losing the financial capacity to re-finance, resulting in an increase in the rate of homeowners filing insolvency.

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.

The dramatic decline in the percentage of homeowners filing insolvency in recent months is not because homeowners no longer carry credit card debt. Rather, the drop in our HBI reflects the recent rapid rise in home prices and resulting increase in home equity. Homeowners with significant unsecured debt are currently able to refinance this debt through a second mortgage or home equity line of credit.

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.

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