Skip to content

Canadian Household Debt on the Rise: What Does it All Mean?

It’s hard to pick up a newspaper these days and not see at least one headline about the elevated debt levels in Canada. If you find yourself in consumer debt, at least you’re not alone. But is all the worry really justified? Is Canadian household debt bordering on excessive or is the fear overblown?

Let’s take a closer look at Canada’s household debt situation and what it all means.

The Debt to Income Ratio Hits a New Record

If we focus on just the facts, the facts don’t lie – Canadian household debt is on the rise. Together we owe $2.16 trillion in debt. As a share of GDP, Canada has the dubious honour of having the highest debt load of the G-7 countries.

How did we as Canadians find ourselves in this situation? Low interest rates for the better part of a decade have encouraged Canadians to go on a borrowing binge.

A popular way to measure household debt is the debt to income ratio. The media loves to use this in attention grabbing news headlines. The debt to income ratio looks at your total debt compared to your income. To calculate your own personal figure, add up all your debts – your mortgage, car loan, line of credit, credit card debt and any other debt you might have – and divide it by your net (after tax) annual income. Multiply that figure by 100 and voila, you have your own debt to income ratio!

As of the fourth quarter of 2018, the average Canadian’s debt to income ratio rose to a record 174%, up from 148% a decade ago.

But there’s no guarantee interest rates will stay low forever. The Bank of Canada has already increased interest rates five times since mid-2017. Although it looks like our central bank has taken a pause with respect to further rate increases, if rates were to continue to rise again in the future, many Canadian families who are already feeling the squeeze from higher interest rates, might feel even more of a squeeze if and when higher interest rates arrive.

Is It All Really So Bad?

At first glance Canada’s debt situation looks pretty dire. While the total debt figure and the debt to income ratio may look scary, those are only two measures of household debt. Another important measure is your ability to service your monthly debt.

To calculate this figure, add up how much debt you have each month. This is debt you’d have to pay even if you were on holidays laying on a beach, sipping an umbrella drink. This includes your mortgage, car payments, minimum credit card payments and minimum student loan payments. Then calculate how much your household brings in on a monthly basis. This includes your salary, your spouse’s salary and any extra income you earn on the side.

Take the debt figure and divide it by your income figure and multiply by 100. Ideally, you want to keep this figure below 40 percent, although if you’re living in a city like Toronto or Vancouver where the cost of living is higher, that number could creep as high as 50 percent (although lower is better). Anything over 50 percent and it should raise the alarm bells. In that case, you should look to cut back on your fixed expenses.

The Bottom Line

When I was paying off my house, my debt to income ratio was almost 450 percent and I was fine. That being said, if your debt to income ratio is high and so is your monthly debt figure, then that should be an area of concern.

Confused about these numbers? Contact us today. We’re happy to walk you through them and help you get on the right financial path.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

New from Climb: Rebuild your credit with the Accelerator Plan

Find out what’s holding you back

  • Get a free credit consultation with one of our expert consultants

Share this article

Share on facebook
Share on whatsapp
Share on linkedin
Share on twitter
Share on email

More recent articles

3 Ways to Boost Your Credit Rating During Consumer Proposal

Most people know that a good credit score is important. A good credit score enables you to qualify for bank
Read More

Life After Consumer Proposal: 6 Things To Do When It’s Done

You’ve finished (or almost finished) your consumer proposal. Congratulations – that’s a huge accomplishment, which you’ve been working towards for
Read More

Why You Might Want to Buy a Home During Winter

Winter is the coolest time of year, so house hunting is probably the last thing on your mind. If you’re
Read More