HOUSEHOLD DEBT AT A GLANCE

Decomposing the debt to income ratio across Canadian CMAs

Households with elevated levels of debt are more vulnerable to increases in interest rates. With interest
rates on the rise, highly indebted households could see their increased required payments exceed their
budgets. The increased debt payment burden may come at the cost of reduced consumption, decreased
savings or opting to make lower repayments on the principal. Some households might even default on
their loans if their incomes are not sufficient to cover higher expenses and credit charges.

If an increasing number of borrowers begin to default on their loans, financial institutions may decrease
lending activities in response. These negative effects could then impact other areas of the economy.
Research has shown that recessions in highly indebted countries tend to exhibit a greater loss in output,
higher unemployment, and last longer compared to countries with lower debt levels.

Household debt to disposable income near record levels

The debt-to-income (DTI) ratio is a measure of the relative vulnerability of indebted households. While
households may be able to service their debt during periods of low interest rates, some may face
challenges when rates rise. Highly indebted households have usually few debt consolidation options to
respond to increasing debt service costs.

Total household debt relative to disposable income has been trending higher as indebtedness has been
rising faster than incomes, with mortgage debt being a major contributor, counting for two-thirds of all
outstanding household debt in Canada. While the increasing trend in the Canadian DTI ratio has now
paused, it remains near a record high, hovering around 170% in Canada and varies significantly among
Canada’s metropolitan areas (see chart 1). Vancouver and Toronto and have the highest DTI ratios in the
nation at 242% and 208% respectively. Thus, the DTI ratio in Vancouver is more than double the level in
Saint John (106%).

While the DTI ratio in Canada have 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 and Edmonton’s DTI ratios was driven by
income growth as total debt levels only decreased slightly. For Hamilton and Victoria, the increased 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

Debt to income ratios: Canadian CMAs

250%
2015Q2 2016Q2 2017Q2 2018Q2
200%

150%

100%

50%

0%

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 costs 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

Mortgage debt service ratios of households

8%
Mortgage interest ratio Mortgage principal ratio
7%
6%
5%
4%
3%
2%
1%
0%
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1
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.

The effect on household finances following a hike in interest rates is a function of how quickly debt
service charges increase. Analysis of debt composition by metropolitan area provides comparisons on
how quickly various shares of household debt are impacted by a change in interest rates. Segmenting
the DTI ratio by debt product provides the share of each product’s debt burden relative to income.

Vancouver households have a 177% mortgage debt to income ratio and a 31% HELOC debt to income
ratio. Thus the debt to income ratio tied to real estate in Vancouver is approximately 208%, more than
three times the ratio in Saint John. Toronto has the second highest DTI ratios for mortgages and HELOCs
at 145% and 25% respectively. For all of Canada, the DTI ratio secured by real estate is approximately
133% (see chart 3).

It is interesting to note that DTI ratio not secured by real estate is highest in Halifax at 47%, with DTI
ratios of 20% for installment loans, 10% for credit cards, 9% for LOCs, and 8% for auto loans. At 30%,
Victoria has the lowest DTI ratio not secured by real estate compared to the national average at 39%.
Chart 3. Mortgages are the main contributor to the total debt burden

DTI by debt product

Saint John
Greater Sudbury
Sherbrooke
Quebec City
Winnipeg
Halifax
Edmonton
Ottawa-Gatineau
Calgary
Montreal
Canada
Regina
Hamilton
Victoria
Toronto
Vancouver
0% 50% 100% 150% 200% 250%

Mortgage HELOC Credit Card Auto LOC Other Installment Revolving

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