Canada’s climbing debt-to-income ratio: what you need to know


Economic shocks are sudden and unpredictable changes in the variables that affect the overall economy, such as an unforeseen rise or fall in the cost of commodities, an unexpected shift in consumer spending, or a housing or stock market crash.

At the individual level, however, you’re likely more concerned that too much household debt might mean you can’t make your mortgage, student loan or car payments if something unexpected happens—such as normal fluctuations in interest rates, or the loss of your job. (These are personal financial shocks, compared to the economy-wide macroeconomic shocks of falling commodity or housing prices.) 

Research into Canadians’ debt shows that younger people, those with household income of at least $100,000, and those with mortgages have more debt than older Canadians, non-homeowners and those with lower incomes. 

The use of debt is also correlated with optimism about our financial futures. People who expect their financial situation to improve over time are much more likely to have more debt: a Statistics Canada study shows that peoples’ expectations about their financial situation are strongly correlated with both their levels of indebtedness and their debt-to-income ratio. 

Even the most optimistic households, however, are still subject to borrowing rules set by lenders, such as the new mortgage insurance rules for the Canadian Mortgage and Housing Corporation, which will go into effect on July 1. 

What do I need to know about the debt-to-income ratio to plan my financial life?

Here are two ways to think about whether the debt-to-income headlines affect you. 

The average might not apply to you

The debt-to-income figure represents an average for all Canadian households, including those who have little or no debt—meaning it must also include some very highly indebted Canadians. In fact, research from the Bank of Canada shows that the number of highly indebted Canadians —those with a debt-to-income greater than 350%—doubled from 2005 to 2014, from about 4% to 8% of all households. So a rising average amount of debt may not capture individual household changes, including yours. 

Your individual circumstances matter

The more debt you have, the more vulnerable you are to “shocks” that can impact your ability to repay it. At the same time, however, your age, income, appetite for debt and expectations about your financial future will all combine to impact your approach to borrowing. 

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