Managing indebtedness: Canadian households are dealing with their debt loads surprisingly well
For the first time since the Bank of Canada began raising interest rates in 2022, total interest payments made by households declined on a quarterly basis as the bank’s recent string of rate cuts delivered much-needed relief to borrowers.
At the same time, household indebtedness relative to incomes dropped again in the third quarter, continuing a trend that began at the start of 2023.
It all suggests Canadians have managed their finances reasonably well, despite concerns going into the rate-hike cycle about their heavy debt loads.
Households paid $176.9-billion in interest in the third quarter, down 0.6 per cent from the second quarter, according to Statistics Canada. The numbers reflect only the interest portion of debt payments, and not obligated repayments of principal.
Most of the interest savings came in the form of lower non-mortgage interest payments, which are more sensitive to changes in the Bank of Canada’s policy interest rate. The bank lowered that rate by half a percentage point to 3.25 per cent earlier this week, though it signalled it would slow the pace of rate cuts going forward.
Meanwhile, debt loads became more manageable. For every dollar of disposable income Canadian households earned, they held $1.73 in credit market debt, which includes consumer credit, and mortgage and non-mortgage loans. Except for the early months of the pandemic, that’s the lowest the debt-to-income ratio has been since the end of 2015.
Rising incomes have been key to the improvement in household finances. Disposable income grew 2.3 per cent in the third quarter, and that helped push the household saving rate to a three-year high of 7.1 per cent, Statscan said.
While the higher savings rate also reflects a pullback by Canadians from discretionary spending – a fact that explains some of Canada’s sluggish economic growth – those savings are a potential buffer for homebuyers who took out mortgages during the height of the pandemic when interest rates were close to zero and face much higher payments as their mortgages reset over the next two years.
There are still reasons to be cautious. While rate cuts have helped most borrowers, rising incomes have disproportionately benefited the top 40 per cent of earners, leaving lower and middle-income households still strained in that respect. But economists are optimistic household finances in general have turned a corner.
“While mortgage resets will continue to add upside risk in the near term, income gains and ongoing rate cuts will relieve some pressure on household finances,” said Shelly Kaushik, an economist with Bank of Montreal, in a note.
This article was first reported by The Globe and Mail
