Source: Pexels

Canada has the third-highest household debt in the world, trailing only Switzerland and Australia and far exceeding any other G7 country, according to a Desjardins report. 

Canada’s household debt as a percentage of GDP exceeded 100% by the end of 2023, with Australia near 110% and Switzerland around 125%. On the lower end of the spectrum, France had just under 65% of its GDP as household debt, with the United States at nearly 75%.

Household debt to GDP compares the total debt held by households to the country’s GDP. A high ratio means that a large portion of a country’s residents’ income is tied up in debt repayments, limiting consumer spending and economic growth. 

High levels also suggest that consumers are vulnerable to financial instability if economic conditions worsen.

“Since households don’t rely on a single year’s income to pay off their debt, the debt-to-income ratio isn’t the most important factor in determining households’ financial vulnerability. What matters is that households have enough money to cover the cost of servicing their debt,” reads the report.

Canada’s high interest rates have led to a larger portion of families’ incomes being dedicated to interest payments. 

All Canadians are spending more of their income on interest payments than they did before the pandemic. In 2023, the lowest 20% of income earners spent 18% of their income on interest payments.

While Canadians’ cost of living has increased, only the top 20% of Canadian earners have seen their disposable income rise since 2021. 

Income inequality reached its highest level in Canada since 2015, seeing the biggest gap between the richest and poorest households in April.

“One of the reasons behind this growing disparity is that higher interest rates affect income distribution, benefitting the rich,” reads the report. 

The richest Canadians have been able to save more, while the poorest Canadians have seen a decrease in savings.

The 10-year average saving rate decreased by 27.1% for the lowest 60% of income earners, while it increased by 23.5% for the top 40% of income earners in Canada. 

“Soaring interest rates and cost of living have crimped Canadian households’ ability to save,” reads the report. 

The Bank of Canada’s interest rate was 0.25% in March 2022, rising to 5% by July 2023. Since then, it has only seen one cut, falling to 4.75% in June 2024. 

Between 2019 and 2023, Canada’s three lowest income quintiles increased their share of mortgage debt. Rising interest rates have made this debt more expensive to service.

While generations have argued since the dinosaurs that their lives were harder than their parents, Desjardins proved this was true for the current generation of young adults in a previous report.

“Housing is much less affordable for today’s younger adults than it was for previous generations,” reads the report.

True North previously reported that housing affordability in Canada reached an all-time low in April.

The report warns that many Canadians have yet to face the shock, as they have been putting off renewing their mortgages. However, many Canadians will be renewing their mortgages within the next 18 months and will experience the effect of high interest rates.