As rates rise, Canadians’ debt gets riskier

If someone owes you a fat stack of cash, now might be a good time to check if they’re still good for it… especially if you happen to be a Canadian financial institution. 

Driving the news: Canada’s top financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), warned major lenders to adopt a “more prudent and active account management approach”—in other words, be extra careful about lending money.

  • A top concern is around the risk of “negative amortization” on mortgages—when a borrower’s monthly payments aren’t enough to cover the interest on their debt.

Why it’s happening: Canadians are taking on near-record levels of debt, which is becoming more expensive as interest payments rise. 

  • Households now hold $1.85 in debt for every dollar of disposable income and are spending nearly 15% of their income to service that debt, according to Stats Canada

Why it matters: OSFI’s alarm-raising signals that interest rate hikes have created pretty serious risks in our economy, and big financial institutions need to get ready to manage it.

  • So far, Canadians are finding creative ways to stay on top of their debt payments, like increasing the repayment period for their mortgage—almost a third of borrowers have extended theirs beyond 30 years.

  • But when people are stretched to the limit by debt, one financial setback can be all it takes to push them into default.

What’s next: So long as the job market remains strong, most analysts agree that people will continue paying their debts. But if that happens to change, things could get messy.—TS