High Risk Mortgages and Insolvency

Home ownership is not a significant contributor to the current rate of insolvencies in Ontario however this does not mean that homeowners are not feeling financial pressure. High home prices, rather than contributing to bankruptcies and proposal in Ontario, are temporarily masking a future financial risk.

Insolvent homeowners have already over-leveraged the equity in their home and have maxed out credit card debts, lines of credit & personal loans. They no longer have enough equity in their home to cover or refinance unsecured debts.  A consumer proposal becomes a solution to eliminate their unsecured debt and keep their home. Eight in ten insolvent homeowners file a consumer proposal over bankruptcy.

Homeowners who are facing debt but not filing insolvency are turning to alternative options like debt consolidation and home equity loans.  Unless they stop borrowing, this is a temporary solution.

Homeowners Have a Reprieve

The percentage of debtors filing a bankruptcy or proposal who own a home has declined steadily over our last two studies. In our 2017 study, only 17% of insolvent debtors own a home, down from 24% in 2015 and 29% in 2013.

In our 2017 study, the average insolvent homeowner carries a mortgage of $191,464. On top of this, he owes an average of $72,510 in unsecured debt, has an unsecured debt-to-income ratio of 216% and has a total debt-to-income ratio of 849%. Homeowners are the only at-risk group to have substantially higher unsecured debts than they did two years earlier.

Insolvent Homeowners 2015-2016 2013-2014
% of all debtors 17% 24%
Unsecured debt $72,510 $68,045
Unsecured debt-to-income 216% 200%
Secured debt-to-income 633% 637%
Total debt-to-income 849% 837%

Insolvent homeowners have significantly higher personal loans and credit card debt than Joe Debtor. The average insolvent homeowner owns $24,917 in credit card debt, 72% more than insolvent non-homeowners. He also owns $29,833 in personal loans, 79% more than insolvent non-homeowners.

Although a small percentage of insolvent homeowners turn to payday loans to make mortgage payments, this is not the norm (just 13% have a payday loan compared to 28% for insolvent non-homeowners). Instead, financially strapped homeowners who have better access to traditional credit max out their credit cards and lines of credit.

The average insolvent homeowner owes a total of $191,464 in secured mortgages. Almost one in ten (9%) have negative equity in their home, even before considering selling costs. Once commissions and other selling costs are included, only 57% of insolvent homeowners have a positive net realizable value in their home. For those with a positive net realizable value, the average available for creditors is only $20,708, or 9% of the average home value of $224,306.

The difference between heavily indebted homeowners who file insolvency and those who do not, are that the insolvent homeowner has already utilized his home equity to restructure his debts.

It should be noted that the lower rate of homeowner insolvencies does not necessarily mean that more homeowners are not experiencing debt problems. While only 17% of insolvent debtors own a home, a separate analysis of our 2017 incoming call data shows that roughly 30% of people contacting our office for debt relief are homeowners with a reported unsecured debt average of $47,000. The decline in homeowner insolvencies can be attributed primarily to increasing house prices in many markets and not necessarily lower debt levels. Those not filing insolvency today turn to other options, including debt consolidation and home equity loans. However, if these homeowners continue to build debt or housing prices fall, they will become the next group of insolvent homeowners.

mortgages and bankruptcy

Personal Information
Male 57%
Female 43%
Average age 46
Marital status Married (61%)
Average family size (including single debtors) 2.7
Average monthly income $2,802 net of deductions
Total unsecured debt $72,510
Average mortgage value $191,464
    Average home value SOA $224,306
    % with negative NRV before selling costs 9%
    % with negative NRV after selling costs 43%
    Average equity for those with positive NRV $20,708
Percentage Filed Bankruptcy 19%
Percentage Filed Proposal 81%
Detailed Information on the amount of average unsecured debt:
Personal loans $29,833
Credit cards $24,917
Taxes $10,898
Student loans $907
Other $5,956