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Debt service costs to rise

The cost of juggling your debts will soon cost you hundreds of dollars more a year.

The household debt service ratio in Canada – that’s the interest and principal we pay as a percentage of disposable income – is already at its highest since late 2008.

And now at 14.2 per cent, Toronto-Dominion Bank expects it to shoot higher still.

This comes as the pace of our borrowing is slowing, to be sure, but also as housing affordability is already stretched, for example.

TD chief economist Beata Caranci and senior economist James Orlando projected in a new forecast Wednesday that the debt service ratio will hit 15.2 per cent in 2020. That’s based on their projections for Bank of Canada interest rate hikes, the next one of which is expected next week, and bond yields.

Open this photo in gallery:

Source: Toronto-Dominion Bank

The Federal Reserve, of course, has been raising its benchmark rate faster than its Canadian counterpart, and the minutes of its last meeting, released Wednesday, show that’s going to continue.

“With the Bank of Canada lagging the Fed on rate hikes, there is room for the mid- to long-end of the Canadian curve to play ‘catch-up’ to their U.S. Treasury equivalents,” Ms. Caranci and Mr. Orlando said of Canadian bond yields.

“The BoC will have to watch this development closely since the consumer is far more stretched than stateside,” they added.

How stretched? The key measure of household debt to disposable income rose in the second quarter to 169.1 per cent, which means we owe about $1.69 for each dollar we have to spend.

That, though, may make the Bank of Canada more cautious, even as the business outlook has been strong and a new trade deal with the United States and Mexico has been all but put to bed.

“The recent and expected Bank of Canada hikes will chip away at consumer discretionary spending, which we think can leave the central bank more responsive to wobbles in the near-term data relative to its U.S. counterpart,” Ms. Caranci and Mr. Orlando said.

“A dominant risk cited by the Bank of Canada is increased interest rate sensitivity due to historically high debt levels,” they added, while, at the same time, they see the central bank “moving up the timing and number of rate hikes” next year.

That debt service ratio of 14.2 per cent breaks down like this: 6.51 per cent to mortgages and 7.64 per cent to other debt.

Here’s a “quick and dirty” example from TD’s Mr. Orlando on how the jump to 15.2 per cent plays out: Based on individual average 2015 income of $70,000 a year, with take-home pay of $56,000, the increase in the cost of servicing debts will mean about $500 more a year.

Of course, debt service ratios are different for everyone as their debt-to-income levels differ, he added.

As The Globe and Mail’s Rob Carrick reports, there’s already trouble on the horizon, based on the latest findings from Equifax Canada.

The overall delinquency rate for non-mortgage debt declined in the second quarter from a year earlier, but it spiked among seniors, that report showed.

“After a period of sustained economic growth, we’re moving back to a slow and steady pace. And finally, new mortgage volume has been negative over the last three quarters. Add these together and we should begin to see upward movement in delinquencies.”

One saving grace, if you want to look at it that way, is that the Bank of Canada may be tame not only because of high debt levels, but also because it wouldn’t be happy to see the Canadian dollar shoot up, which is what happens with higher rates.

“Given the need to keep exports competitive, and the lagged impacts of higher rates on housing, the BoC is likely to stand in the way of a sustained appreciation by taking an extended pause on rates after January,” Avery Shenfeld and Katherine Judge of CIBC World Markets said in a new outlook for the loonie.

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151 years ago today …

The United States took possession of Alaska from Russia, having paid $7.2-million for the property, among other things paving the way for jokes about the view of Russia from Sarah Palin’s window.

Open this photo in gallery:

Bears fish at the falls on the Brooks River in Katmai National Park in southern Alaska, July 19, 2015MARK MEYER/The New York Times News Service

Think, too, what US$7.2-million would get the Americans today: A nice house in Vancouver or a handful of fixer-uppers in Toronto, with the tax on foreign buyers included.

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