Bank of Canada interest rates force more Canadians to renegotiate debt

Bank of Canada interest rates force more Canadians to renegotiate debt

Latest bankruptcy data shows consumers scrambling for relief

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Canadian households in some provinces are renegotiating debt payments at a record clip, as the financial squeeze from high interest rates continues to take its toll.

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“Household debt, declining purchasing power due to inflation and the sharp rise in interest rates are putting pressure on households’ finances,” Charles St-Arnaud, chief economist at Alberta Central credit union, said in a note on the latest data from the Office of the Superintendent of Bankruptcy.

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For February, proposals to renegotiate loans rose 31.2 per cent in Ontario from the same time last year, overtaking the previous high from November 2023. In Saskatchewan, loan renegotiations were up seven per cent year over year, also a record. Across the country, total proposals to renegotiate were up 28.6 per cent year over year and 404 per cent from 2007, when the bankruptcy superintendent began keeping records for provinces. All provinces, St-Arnaud said, set new February records for loan renegotiations.

“March might be the all-time high (for loan renegotiations) however you look at it,” St-Arnaud said.

In the current economic climate, it makes sense that more people are seeking to renegotiate their debt, St-Arnaud said.

“I think the big reason is people still have income,” the Calgary-based economist said. Banks, he said, are more likely to prefer to extend the terms of amortization on a mortgage, for example, to help people manage higher interest rates.

The numbers, released late last month and which also included bankruptciees, also reveal how the debt-renegotiation picture has deteriorated since the pandemic hit.

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“I consider 2019 the last normal period. Being back and above (those levels) shows there’s greater financial stress than pre-pandemic,” St-Arnaud said, explaining why he highlighted that period in his note.

Overall, the number of households forced to renegotiate the terms of loans was 36 per cent above pre-pandemic levels.

The provinces that reported the biggest change were Manitoba at 83.1 per cent, British Columbia at 76.6 per cent and Saskatchewan at 59.8 per cent. Alberta and Ontario experienced smaller increases at 48.9 per cent and 39.4 per cent, respectively.

St-Arnaud said a slowing economy could increase the pressure if unemployment starts to rise, and that the next few months will be critical. Statistics Canada releases jobs numbers for March on Friday.

“We will be watching to see whether insolvencies deteriorate more than seasonal patterns suggest over that period,” he said.

Business insolvencies, meanwhile, fell in February but continued to top out above 2019 levels. They were 106.3 per cent higher than the period prior to the pandemic, rising the most in British Columbia, Ontario, Quebec and New Brunswick.

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“In Ontario, Quebec and New Brunswick, the rise in business insolvencies is mainly the result of higher bankruptcies, while proposals (a renegotiation of loans) are playing a bigger role in B.C.,” St-Arnaud said.

Business insolvencies accounted for five per cent of total insolvencies, St-Arnaud said.

“We will be looking to see whether the CEBA repayments lead to more business bankruptcies,” he said.

The $60,000 Canada Emergency Business Account (CEBA) loans were given out to almost 900,000 businesses and non-profit organizations to help them survive the pandemic. Up to one-third of the loans was forgiven for those who repaid the remaining two-thirds by Jan. 18 — otherwise, the debt became a three-year loan with five per cent annual interest.

— With additional reporting from The Canadian Press

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Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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