credit and debt
DON'T BE NERVOUS ABOUT DEBT SERVICE Not only have debt service ratios not spiked amid rising interest rates, rising debt loads, and increased variable rate exposure, they’re lower than they were six months ago.
The debt service ratio (DSR) is a measure of the proportion of disposable income that is spent paying back loans and is a good measure of how well households can afford their debt loads. Interest rates are one factor impacting DSRs: when rates rise borrowing becomes more expensive and a greater share of income is spent on debt. But other factors are at play, like wages: when people are earning higher wages, a smaller share of income is needed to service that debt (all else being equal).
The current DSR of 13.6% in the second quarter is up from the previous quarter, but less than the 13.7% ratio from six months ago, and well below the pre-pandemic high of 15.0%. The mortgage DSR, at 7.0% is also less than it was at the end of last year, in spite of quickly rising rates, though that’s still close to the 20-year high level of 7.2%. Though rising incomes will serve as a mitigating factor, rising interest rates in the coming months are sure to elevate these DSRs from current levels.
DON’T FRET OVER DEBT—AT LEAST, NOT YET
16%
15.01%
15.02%
14%
13.63%
12%
12.25%
11.71%
10%
8.74%
7.86%
8%
6.47% 5.24%
6.59% 7.04%
6.27%
6%
6.01%
4.50%
4%
1.75%
2%
2.00%
1.50%
0%
NON MORTGAGE DEBT
MORTGAGE DEBT
DEBT SERVICE RATIO
BOC TARGET RATE
SOURCE: STATISTICS CANADA. TABLE 11-10-0065-01 DATA: PROPORTION OF DISPOSABLE INCOME GOING TO DEBT SERVICE, QUARTERLY, CANADA
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