Consumer insolvencies are set to rise over the next few years as indebted households struggle with higher borrowing costs and rising unemployment, according to a new report from RBC Economics.
Cracks are already starting to form, the report says, noting the rate of consumers 90 or more days late on their instalment loan payments is rising. Instalment loans are typically used for one-time expenses such as an unexpected emergency or home renovation.
On the contrary, mortgage arrears remain at record low levels.
We expect the environment to remain challenging for years to come—but an all-out collapse is unlikely.RBC Economics
Canadians' household debt to disposable income ratio was 180.5 per cent in the fourth quarter, returning to pre-pandemic levels. The ratio means Canadians owed roughly $1.81 in credit market debt for every $1 of household disposable income.
"Over the last year, the burden of that debt has grown even heavier for Canadian households," RBC assistant chief economist Robert Hogue wrote in the report on Wednesday.
"Government [COVID-related] support programs have largely ended, the cost of living has soared with inflation, and interest rates have spiked. These developments have caused an increasing number of Canadians to fall behind on debt service payments that have suddenly swelled."
RBC predicts consumer insolvencies could rise by nearly 30 per cent over the next few years.
The analysis also suggests projected rising job losses could begin to reverse the decline in mortgage delinquencies over the medium to long term as rate hikes and heavier debt service loads weigh on households.
Those with variable rate mortgages are already feeling the weight of higher rates, while many homeowners with fixed rates will feel the pain between the years 2025 and 2027 when it comes time to renew, RBC says.
An Angus Reid poll on Tuesday highlighted that 77 per cent of homeowners are worried about what higher rates will mean for their next mortgage renewal.
The bank sees Canada's unemployment rate reaching 6.6 per cent by early next year, from the current 5 per cent.
Despite painting a picture of mounting financial pressure, RBC expects "any financial troubles to remain relatively contained in the short to medium terms."
"We expect the environment to remain challenging for years to come—but an all-out collapse is unlikely," the report said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.