Low interest rates over the past six years have contributed to a significant increase in Ontario household debt and rising rates are expected to push debt levels even higher by 2021, according to a report by the Financial Accountability Office of Ontario (FAO).
A commentary by the FAO released on Tuesday said the average Ontario household owed nearly $154,000 in 2016 compared to $119,000 in 2010.
“As a share of disposable income, household debt reached 171 per cent in 2016 – 21 percentage points higher than 2010 and eight percentage points higher than households in the rest of Canada,” the report said.
A boost in consumer spending and home purchases due to low interest rates has contributed to economic growth in Ontario, however, it also amounted to deepening debt, the FAO said.
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The report states that household debt will only grow as interest rates go up in the next several years.
The FAO estimates the effective interest rate on Ontario household debt will rise from four per cent in 2016 to 5.1 per cent by 2021. For the average household, the annual debt payments will increase by $3,000 to $15,500.
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“The share of households’ income spent on debt payments is expected to rise from 13.9 per cent in 2016 to 15.3 per cent by 2021, the highest share recorded since at least 1990,” the FAO said.
“In particular, low-income households, which spend nearly a third of their income on debt payments, will be disproportionally impacted from the rise in interest rates.”
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The FAO said high debt loads increase the vulnerability of households to financial risk.
“A sharper than expected rise in interest rates would further increase household debt payments, forcing households to scale back spending on goods and services,” the report said. “This could have potentially significant negative implications for the broader economy.”
The FAO is projecting a gradual increase in the Bank of Canada’s policy interest rate over the next three years, which will lead to a rise in consumer and mortgage interest rates.
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