Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Households’ indebtedness increased slightly in 2025Q1, the first increase since 2023Q1, but remained close to its lowest level since 2015, if we exclude the pandemic. The indebtedness ratio had been improving over the past 2 years as income grew faster than debt, with higher interest rates reducing the attractiveness of borrowing. Nevertheless, at 173.7%, household indebtedness remains elevated and a significant concern and risk for the Canadian economy.
The debt-service ratio was unchanged at 14.4%, marginally below its pre-pandemic level. The lower debt-service ratio in recent quarters is mainly the result of higher income compensating for the higher debt payments despite lower interest rates. However, it is important to note that debt payments have increased much less than the rise in interest rates would have suggested. This results from households adapting to higher interest rates by lengthening their loans’ terms or amortization periods to keep their payments (interest and principal combined) from increasing too drastically. However, this comes at the expense of households remaining indebted for longer. With indebtedness and interest rates remaining high, this pattern should remain in the coming year, as many mortgage borrowers have to renew at higher interest rates.
As mentioned, households are already reducing their principal payments to offset the pressures from higher interest payments, easing the negative impact on their budget. This is also evidenced in the sharp rise in proposals (renegotiation of terms) in the insolvency data, which are above pre-pandemic levels. However, as we have shown (see Will it be a hard landing or a soft landing? The labour market will decide), a shock to household income as a result of job losses would lead to a surge in insolvencies and significantly impact the economic outlook. This is where the weak labour market in recent months, due to the elevated uncertainty and the impact of the US tariffs, needs to be monitored closely.
The ratio of household debt to disposable income rose by 0.4 percentage points in the first quarter of 2025 to 173.9. This is 11.7 percentage points below the record set in 2021Q4. This means that households owe on average $1.74 in debt for each dollar earned. The increase in the ratio in Q1 was the result of an increase in debt of 1.1% q-o-q, while the increase in disposable income was slower (+0.8% q-o-q).
The increase in disposable income resulted from a rise in compensation of employees (+0.8 % q-o-q) and government transfers (+3.2 % q-o-q). The share of government transfers in disposable income rose to 19.5% from 19.1%, slightly above its pre-COVID levels.
On the debt side, the increase in total household debt was due to a rise in all categories, with mortgage loans (+0.8% q-o-q) q-o-q) leading the way, followed by non-mortgage debt (+0.8% q-o-q).
Compared to pre-pandemic, household debt to disposable income has decreased by 7.7pp. We estimate that if it were not for the continued rise in disposable income, the indebtedness ratio would stand at 232.3%. Conversely, if households didn’t accumulate debt over the period, the ratio would be 135.3%.
The debt-service ratio, the share of income households must spend to repay the interest and obligated principal payment on their debt, was unchanged at 14.4%. This means that, for each dollar earned, households need to spend $0.14 to service their debt.
The details show that the rise in debt payments resulted from an increase in the interest payments (+4.1% q-o-q) as higher interest rates continued to pass-through higher interest debt payments. On the flip side, obligated principal payment declined (-4.4 q-o-q). Obligated principal payments have been on a declining trend since 2022Q1, as a greater share of fixed debt payment on variable rate debt has been redirected away from principal payment to cover the increase in interest payments and households restructure their debt on longer maturity.
The debt-service ratio is about 0.5 percentage points (pp) lower compared to its pre-pandemic level, despite interest rates being higher and debt level having increased. However, its composition has changed significantly. As such, the contribution from debt payments is higher by 4.9pp, with most of the increase coming from higher interest payments (contributing +4.8pp). With more borrowers renewing at higher rates, we should expect further rises in interest payments. Moreover, most of the rise comes from mortgage debt payments (+3.3pp), while the increase is more modest for non-mortgage (+1.4pp).
On the flip side, borrowers their obligated principal payment has increased by a meager 0.2pp since pre-pandemic, despite debt levels having increased over the period. This situation shows that households have managed to absorb the cost of higher interest rates at the expense of extending their debt maturity.
The continued growth in disposable income helped hold back the debt-services ratio, contribution -4.0pp.
The household saving rate eased to 5.7% from 6.0. The lower saving rate was due to a slower rise in disposable income than in consumer spending over the period (+0.8% q-o-q vs 1.0% q-o-q).