Rising borrowing costs push interest payments to nearly 10% of disposable income
Canadians are now spending more of their income on interest payments than at any time in the last 30 years, according to recent data from Statistics Canada.
Households spent 9.59% of their disposable income just on interest, marking the highest level since 1992.
In other words, Canadians paid $43.8 billion in interest alone in the second quarter, up 14% from the same period last year. This is more than double what households were paying toward debt before the COVID-19 pandemic.
The jump in interest costs follows a series of rapid rate hikes by the Bank of Canada, which started raising interest rates in March 2022. The benchmark rate went from 0.25% to 5% in under 18 months, sharply increasing the cost of borrowing for Canadian households.
Though the central bank has since lowered rates slightly to 4.25%, the financial impact of those hikes is still being felt across the country.
Read more: Are prospects improving for first-time homebuyers in Canada?
The rising interest payments are a particular strain on households that are already some of the most indebted among advanced economies.
Despite the increasing interest costs, there are signs that Canadians are borrowing less. Credit market debt, compared to disposable income, dropped to 175.5% – meaning households owe $1.76 for every dollar of income – continuing a decline that has now stretched five quarters.
At the same time, incomes are on the rise, growing at an annual rate of 7.6% in the second quarter. Canadians are also saving more, with the household saving rate climbing to 7.2%.
However, the broader debt service ratio, which includes both interest and principal payments, reached nearly 15%, close to a record high. Meanwhile, net worth per capita increased slightly, rising 0.7% to $467,683.
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