Personal insolvencies become more common when interest rates rise. In Canada, people are filing for insolvency at a higher rate than usual. According to The Toronto Star, experts are saying that we haven’t had this many instances since the financial crisis in 2008-09.
President of the Canadian Association of Insolvency and Restricting Professionals, Grant Christensen said, “It’s fairly clear what’s going on. There’s a close correlation between interest rates and insolvencies.”
According to his figures, in the first nine months of 2019, 102,023 Canadians had to file for insolvency. This number is the highest it has been in the past ten years.
The Bank of Canada’s standard rate went up from a percentage of 0.5 to 1.75 from July 2017 to October 2018.
Christensen noted, “There’s a two- to three-year lag between a change in interest rates and when it impacts insolvencies. Because rates rose from 2017 to 2018, we’re seeing the impact now. It will probably start to level off some time in mid-2020.”
The senior vice-president of BDO Canada, Adré Bolduc said that if the Bank of Canada were to raise their interest rates again the number of insolvencies would most likely raise along with them.
Bolduc noted, “If a household is living paycheque to paycheque and there’s a significant rise in interest rates, more of them will be pushed over the edge.” According to BDO, the number of Canadians living paycheque to paycheque is 50 percent.
He also noted, “People aren’t saving. They don’t have any savings. So when there’s a crisis, they put it on credit, and they end up getting into trouble.”
“They usually understand what’s caused the problems. But nobody plans to lose their job, or to get divorced.”
Bolduc also thinks that a higher number of self employed Canadians is a contributing factor in the growing amount of insolvencies.
Bolduc told The Star, “There are more and more self-employed people. And they might not realize all the deductions they need to make, and they can run into problems that way.”
A Western University professor at the Ivey School of Business, Mattew Sooy believes that homes with a lower income are more at risk when higher interest rates come along.
Sooy noted, “In the lowest quintile, it’s more like 400 percent. So if interest rates go up by two percentage points, that’s 8 percent of your household income just on extra interest. It’s expensive to be poor.”
Benjamin Tal and Avery Shenfeld are economists for CIBC and they believe that raising the rates would be a bad idea.
They wrote, “If raising the overnight rate to only 1.75 percent could set off a climb in insolvencies, before any major job losses have been seen, it’s clear that taking rates to anywhere near what was historically neutral, or even where some models might currently put neutral, could prove to be overkill.”
According to the Bank of Canada 3.25 percent could be the “neutral” rate in Canada’s economy. They suggested the high number in April of 2019. Tal and Shenfeld added that high insolvency numbers may not be as bad as they sound because not everyone who files for insolvency also declares bankruptcy. Some people who file for bankruptcy do it multiple times and that is also a rising issue.
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