Canadians To Get a (Short) Break From Rising Debt Service Costs

Canadians To Get a (Short) Break From Rising Debt Service Costs

As we look back on the year that was, one of the biggest surprises was the movement in interest rates. Rather than rising, interest rates fell in 2019. The decline in rates came without any help from the Bank of Canada, which held the overnight rate steady through the year. Rather, global events and worries about trade wars and recession pushed Canadian yields down.

The fall in government yields has passed through to mortgage rates and supported a rebound in home sales and home prices. Yet, for most Canadians households, the decline in rates has had little impact. Indeed, the debt service ratio – the share of disposable income that goes toward servicing existing household debt – rose through this year, hitting 15% in the third quarter of 2019 – the highest level on record (Chart 1).

The good news is that the outlook for 2020 is brighter on this front. The debt service ratio should start trending lower in the coming quarters, as the decline in rates over the past year flows through to households. And, with the Bank of Canada likely to cut its policy rate next year, households should also get a break on their unsecured debt burden. All told, we expect the debt service ratio to fall by roughly 30 basis points by the end of 2020, reversing the increase over the past year.

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