Debt service costs for Canadian households will climb to a record over the next two years, creating a drag on spending that may limit further rate increases by the central bank, according to Toronto-Dominion Bank.

  • Interest and principal payments will exceed 15 per cent of disposable income by the end of 2020, breaking the current record set in 2007 to become the highest in data back to 1990, TD economists including Derek Burleton wrote in a note Thursday
  • The “effective” interest rate on household debt including mortgages will rise between 95 basis points and 125 basis points over this time.
  • About a quarter of mortgages are renewed each year, meaning in four years most borrowers will face higher interest costs
  • Consumers may be able to lower their bills by taking steps such as stretching out the amortization period of their mortgages. “No matter which scenario you look at, one thing remains in common: debt service costs will likely outpace income growth over the next couple of years, squeezing consumer spending,” the economists wrote
  • Rising debt service ratios will require households to spend between $400 and $700 more to service debt
  • Growth in real consumer spending will average 1.7 per cent between 2019 and 2021, which is 1 percentage point less than the prior three years
  • TD says the balance of risks around its forecast for three more interest rate hikes in 2019 is skewed more toward two hikes than four