Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Households’ indebtedness increased slightly in 2025Q2 for a second quarter in a row, 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 174.9%, household indebtedness remains elevated and a significant concern and risk for the Canadian economy.
The debt-service ratio rose marginally to 14.4%, marginally below its pre-pandemic level but higher than before the Bank of Canada started increasing its policy rate. The higher debt-service ratio in recent quarters is primarily due to weaker income growth, as debt payments continue to rise, despite lower interest rates. However, it is important to note that debt payments have increased much less in recent years 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 a longer period. With indebtedness and interest rates remaining high, this pattern is expected to persist in the coming year, as many mortgage borrowers will 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 on the economic outlook. This is where the job losses in recent months, due to the elevated uncertainty and the impact of the US tariffs, are a worry and need to be monitored closely.
The ratio of household debt to disposable income rose by 1.2 percentage points in the second quarter of 2025 to 174.9. This is 10.8 percentage points below the record set in 2021Q4. This means that households owe on average $1.75 in debt for each dollar earned. The increase in the ratio in Q2 was the result of an increase in debt of 1.0% q-o-q, while the increase in disposable income was slower (+0.3% q-o-q).
The increase in disposable income resulted from a rise in compensation of employees (+0.2 % q-o-q) and property income (+1.5 % q-o-q). On the flip side, government transfers declined 3.2% q-o-q, leading to the share of government transfers in disposable income easing to 18.8% from 19.4%, still 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 (+1.1% q-o-q) leading the way, followed by non-mortgage debt (+0.7% q-o-q).
Compared to pre-pandemic, household debt to disposable income has decreased by 6.3pp. We estimate that if it were not for the continued rise in disposable income, the indebtedness ratio would stand at 237.1%. Conversely, if households didn’t accumulate debt over the period, the ratio would be 133.6%.
The debt-service ratio, the share of income households must spend to repay the interest and obligated principal payment on their debt, edged marginally higher to 14.41% from 14.37%. 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 (+1.7% q-o-q) as higher interest rates continued to pass-through higher interest debt payments, and obligated principal payment rose (+1.0 q-o-q). Obligated principal payments have restarted to increase after a period where a greater share of fixed debt payments on variable rate debt has been redirected away from principal payments to cover the increase in interest payments. However, the increase remains smaller than debt growth as households continue to 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, since the BoC started to increase its policy rate in March 2022, it has increased by 0.8pp. The change in its components shows that the contribution from debt payments is higher by 4.3pp, with most of the increase coming from higher interest payments (contributing +5.1pp). 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 (+1.8pp).
On the flip side, borrowers saw their obligated principal payment had decreased by 0.8pp since the BoC started rising interest rates, 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 -2.7pp.
The household saving rate eased to 5.0% from 6.0%. The lower saving rate was due to a slower rise in disposable income than in consumer spending over the period (+0.3% q-o-q vs 1.1% q-o-q).
Looking for more? Subscribe now to receive Economic updates right to your inbox here!
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication