Canadian Household Debt-To-Income Ratio Near Record High

While the DTI ratio in Canada has not changed much over the last 9 quarters, that is not the case for all centres. Significant year-over-year percentage point changes have occurred in Edmonton (-8.3), Calgary (-7.9), Hamilton (5.9) and Victoria (4.2). The drops in Calgary’s and Edmonton’s DTI ratios were driven by income growth, as total debt levels only decreased slightly. For Hamilton and Victoria, DTI ratios increased as a result of strong growth in mortgage debt and installment loans.

Chart 1. DTI ratios are highest in Vancouver and Toronto

Sources: Equifax, Statistics Canada, Conference Board of Canada, CMHC calculations

Servicing costs of mortgage debt relatively constant

Even though mortgage debt has risen, the share of household income needed to service mortgage debt has not varied dramatically over the last several years. The increasing share of income that goes to repayment of the principal represents equity accumulation, while the share that goes to interest is the cost of credit. The total cost of mortgage payments relative to total disposable income has hovered around the 6% mark for the past 10 years. The interest portion of household mortgage payments has, for the most part, been trending lower for about 25 years (see chart 2).

Chart 2. Principal repayment share has been increasing

Source: Statistics Canada Table 11-10-0065-01

Household debt composition determines sensitivity to interest rate changes

The composition of debt influences how quickly changing interest rates impact households. Line of credit loans and mortgages with variable interest rates would be the first to feel the impact of higher interest rates. Consumers holding existing credit products with fixed interest rates, such as auto loans, would not be affected at all on these items. Given that three quarters of mortgages have fixed rate terms, rising rates would not impact these loans until renewal. A rise in the mortgage rate would impact about half of all mortgage loans within the first year following an increase.

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