Canadians are among the world’s most indebted. How they handle that debt varies

A new report from Desjardins shows Canadians are facing high levels of debt, leaving a majority facing a “fragile situation.”

The report, published Tuesday, showed that while household disposable income and expenditures are up, allowing the household savings rate to stay higher than before the COVID-19 pandemic, disparities exist over how much people can save depending on the income bracket they’re in.

Even after a recent interest rate cut to 4.75 per cent, the rate increases by the Bank of Canada through the pandemic from 0.25 per cent in March 2022 to five per cent in July 2023 came as Canadians had the third-highest household as of the fourth quarter of 2023.

It’s not the first time Canada’s reached this level, having also been the third-most indebted nation in 2021.

“The effect of indebtedness is really unequal for Canadian households of different revenue categories,” Lorenzo Tessier-Moreau, Desjardins principal economist, told Global News. “Canadians on the lower spectrum of income are impacted a lot more by the effect of interest rate hikes.”

More than half the debt, both mortgage and consumer, is held by Canadians in the two highest income quintiles. But 60 per cent of households in the lower three income brackets still hold 45 per cent of total debt even though the report shows just 35 per cent of income and assets belong to them.

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The report adds this group also take on more debt through spending.

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While the wealthiest Canadians are saddled with the majority of the debt, Tessier-Moreau says they also have more assets and investments. The report suggests the wealthiest households were able to save more than $35,000 on average in 2023.

For lower income people, Tessier-Moreau, “debt service represents a way larger share of their income and that’s actually the main risk in the present situation.”

With the jumps in interest rates, combined with rising cost of living, Canadians have found it even more difficult to save with 60 per cent finding their income has not kept up with the cost of living. According to Tessier-Moreau, that’s not to say those in the 60 per cent have saved nothing but they may have to spend more in order to stay afloat, such as drawing on their savings.

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This also means, according to the report, having to make sacrifices to meet their financial obligations, curbing spending, taking on more debt to make “ends meet” or make debt repayment a priority.

Financial institutions, including Desjardins, are expecting more rate cuts to come this year and Tessier-Moreau said while mortgage renewals coming in the next two years could lead to more constraints, cuts will still help.

Meanwhile, he said, “We don’t only have to think about the expense but also the revenue. Maybe we should put more focus on and put more energy trying to bolster and increase revenues for Canadians on the lower income spectrum.”