The bulk of Canadians’ disposable income is going directly towards paying off their debts, according to a new report released by Statistics Canada on Wednesday.
The abrupt end to almost zero interest rates era has put many households in a financial bind, making for the highest debt service ratio on record since 1990.
The proportion of disposable income going to debt payments has risen to 15.22% in the third quarter, up from 15.08% in the second quarter.
The average Canadian household is now spending about 15 cents of every dollar (after tax) to service their debt.
That’s 5 cents more than the average household in the U.S., which is paying a debt ratio of 10%.
Economists are predicting that the debt ratio will only worsen with time, as many homeowners who have to renew their mortgages will have to do so at even higher rates.
“The main take-away is that we’re starting to see those debt service costs already pressuring household finances,” Bank of Montreal economist Shelly Kaushik told the Globe and Mail. “But we haven’t felt the full effect of those higher rates just yet.”
Debt levels in Canada have dramatically skyrocketed since the early 2000’s, in part due to the once rock-bottom interest rates that were designed to stimulate the economy following the 2008 recession and then again after the pandemic.
Canada’s housing crisis at one time only seemed to affect southern Ontario and B.C.’s Lower Mainland, however today it’s a problem throughout the country.
Canadians who wish to become homeowners may now do so only by agreeing to ever increasing mortgage debts.
The Bank of Canada raised its policy rate to 5% from 0.25% at the beginning of 2022, which forced Canadians to contend with the fastest tightening of monetary policy in decades.
Total mortgage interest payments have now shot up by 90%, when compared to the first quarter of 2022, according to the Statistics Canada report.
At the same time, the amount of mortgage principal paid has fallen by 16.8%.
The average Canadian is now devoting 9.26% of their disposable income to interest payments, more than any other year dating back to 1990.
This has led to a slowdown in Canadians borrowing money, during these times of high interest rates.
However, between 2024 and 2026, it’s estimated that Canadian mortgages are set to renew for a total amount of around $900 billion.
That amount of money could lead to those in debt being struck with “payment shock,” depending on how interest rates are controlled over the next several years.
On a more positive note, the majority of economists believe that the Bank of Canada is done raising interest rates for the time being and that they will begin to reduce them at some point in mid-2024.
“The last decade or so of near-zero rates was historically an anomaly,” said Kaushik. “You would expect to see households still feeling that payment shock, even if the [mortgage] rates that they’re renewed at are lower than what we’re seeing today.”
