As rates rise, households sit on record debt piles

By Staff | March 15, 2022 | Last updated on March 15, 2022
2 min read
House bubble
© Rafael Ben-Ari / 123RF Stock Photo

Driven primarily by Canada’s hot housing market, both household wealth and debt levels surged to record highs in 2021. Now, as interest rates rise, record debt burdens stand to become costlier.

According to a new report from Royal Bank of Canada (RBC) economists, Canadians’ net wealth finished 2021 at $15.9 trillion, up a “stunning $3.6 trillion” from the end of 2019, the report noted.

Over half of the gain in wealth (57%) came from rising real estate values.

“We look for that momentum to flow into [the first quarter] as home prices continue to rise,” it said.

Recent gains in financial assets are likely to be “partially dragged down in Q1 as stock markets soften,” RBC added.

The strong housing market spurred mortgage borrowing and also drove debt to record levels at the end of 2021. RBC reported that total mortgage debt rose by $44 billion in the fourth quarter and now sits $300 billion higher than pre-pandemic levels.

The growth in debt, combined with declining pandemic-related income supports, saw the debt-to-income ratio rise to 186.2% in the fourth quarter — also a new record.

Now, as interest rates rise, debt servicing costs will ramp up too.

However, the report noted that there are a couple of factors that should cushion the impact of rising rates.

For one, the buildup in debt during the pandemic occurred at very low interest rates, so debt payments currently represent a smaller than typical share of income.

And a significant chunk of that debt is in fixed-rate mortgages, which won’t adjust immediately as rates rise.

Ultimately, as loans are renewed at higher rates, debt servicing costs will increase, the report noted. However, RBC expects incomes to rise, too, “as strong demand and limited supply push wages higher.”

Additionally, many households accumulated extra savings during the pandemic, as public health restrictions curbed spending and extraordinary government supports boosted incomes.

“This savings trove is expected to help backstop household purchasing power even as interest rates rise and the war in Ukraine sends global inflation rates higher,” the report said. staff


The staff of have been covering news for financial advisors since 1998.