The indefatigable ability of Canadians to shoulder an ever increasing mountain of debt is being tested.

The country’s biggest banks began raising key borrowing rates last week, just as the busy season for residential real estate gets underway. In addition, the mortgage market looks set for a particularly heavy year of renewals in an environment where debt-servicing costs are already rising at the fastest pace in a decade.

How well Canadian households can weather the squeeze has become one of the biggest questions for policy makers and will determine whether the economy is headed for a mild, or sharp, slowdown. Bank of Canada Governor Stephen Poloz will address the topic in a speech on Tuesday.

“The economy has never been as levered as it currently is, and the economy is far more interest sensitive than it has been in the past, to a degree that we don’t have certainty over how each interest rate hike is going to affect Canadian consumers,” Frances Donald, senior economist at Manulife Asset Management, said by phone from Toronto. “All we know is it’s going to be painful, but how painful isn’t quite clear.”

The heavy debt burden is one of the reasons the central bank has been reluctant to raise reluctant to raise borrowing costs further, after hiking interest rates three times between July and January. Given the nation’s debt load -- as of February, households had a record $2.1 trillion of mortgage and non-mortgage debt -- Poloz estimates the economy is 50 per cent more sensitive to rate hikes than in the past.

Here’s what households are up against:

Mortgage Season

Canada is entering its busy season for real estate, with purchases concentrated in the April to July window. Some 47 per cent of existing mortgages need to be refinanced this year versus 25 per cent to 35 per cent typically, according to Ian Pollick, head of North American rates strategy at Canadian Imperial Bank of Commerce in Toronto.

At the same time, the country’s biggest banks are raising key mortgage rates. Toronto-Dominion kicked it off Thursday, hoisting its five-year fixed mortgage rate 45 basis points to 5.59 per cent. Royal Bank followed with its own hikes Friday.

New mortgage stress tests are pushing some borrowers from the big banks to alternative lenders charging higher rates.

“That’s an unfortunate outcome of the stress test,” Will Dunning, an economic consultant who specializes in the housing market, said by phone from Toronto. “In that sense, the stress test is not reducing risk. It’s increasing risk.”

Cost of Debt

The vise is tightening. According to Statistics Canada, total payments on debt made by Canadian households rose 6.7 per cent in the fourth quarter from a year earlier, and the interest-paid component climbed 9.2 per cent. Those were the biggest gains since the financial crisis. A moving average of quarter-over-quarter changes shows a similar pattern, with the 1.62 per cent increase in the latest period the fastest since 2008.

Debt payments now represent about 14 per cent of household disposable income, the highest share in three years. Donald expects the debt-service ratio to continue moving higher over the coming quarters.

“The world spends a lot of time talking about the level of Canadian debt being extremely elevated, but what matters most is not the level of debt that Canadians hold, but the cost of carrying that debt,” the Manulife economist said. “Canadians are going to start to feel the pinch.”

Cracks Appearing

There are already signs of strain. The roll rate -- the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies -- reached the highest since 2008 for one credit card program, while delinquencies for another were above the 10-year average, according to Royal Bank of Canada credit analyst Vivek Selot.

While the level of mortgage arrears is still low by historical standards, a rising debt service ratio could signal that’s about to change.

Retail Sales

Canada’s economy led the Group of Seven in growth last year, mostly because of the willingness of the country’s consumers to spend money. But growth is expected to slow this year. Gross domestic product unexpectedly shrank in January. Data for February is due Tuesday.

The nation’s retailers have already had a tough few months. Retail sales in February were still 1.8 per cent below 2017 peak levels. In volume terms, the input used to calculate gross domestic product data, first-quarter retail sales probably posted the biggest quarterly drop since the 2008-09 recession.

The low unemployment rate and decent economic growth will help the economy withstand higher rates, though risks are increasing.

“You have some capacity in the economy to absorb this, but the fact that rates are going up isn’t positive for consumers, because it’s making credit more expensive,” Bloomberg Intelligence analyst Paul Gulberg said Friday by phone. “That’s the but.”

--With assistance from Erik Hertzberg