RBC Says Canada's Debt Service Ratio Will Climb From 14.5% Even If Rates Hold October 28

Two rates, two jobs

The confusion comes from treating two different rates as one.

The overnight rate is the Bank of Canada's policy lever. It directly drives prime, which is why it matters immediately for variable-rate mortgages, lines of credit and other floating consumer credit. Its effect on longer-term borrowing is indirect and delayed.

Fixed mortgage rates are priced off Government of Canada bond yields, chiefly the five-year for the most common term. Those yields move every trading day on what investors expect the Bank to do over the life of the bond, plus a premium for holding longer-dated debt. When the market expects hikes in 2027, the five-year yield rises now. The Bank's own explainer says a lower five-year bond yield would show up as lower five-year fixed mortgage rates; the reverse holds as well. Lenders add their own spread for funding, risk, capital and competition, so the link is strong rather than mechanical.

The recent record makes the point better than any theory. Here is how the benchmark curve moved while the policy rate sat still.

The five-year closed at 3.69% on three separate days in late September, its high for the stretch, according to Bank of Canada benchmark yield data. It has eased since, but at 3.55% on the day RBC published, it was still about 33 basis points above its late-August level. The Bank did nothing in between.

Lenders followed the bond. All six big banks lifted fixed rates over roughly five weeks heading into October, with increases concentrated in three- and five-year terms. That is the repricing a "watch October 28" headline misses: the letter in your mailbox already reflects it.

A national average, not your mortgage

The 14.5% figure is easy to misread, so it is worth being precise.

The household debt service ratio is total household debt payments, principal and interest, divided by household disposable income, across the entire country. Statistics Canada's second-quarter data put it at 14.52%, made up of 7.72% for mortgage debt and 6.80% for everything else: car loans, credit cards, lines of credit. In dollar terms that is about $295.3 billion in annualized debt payments against roughly $2.03 trillion in disposable income.

That makes it a macro thermometer. It is not your gross or total debt service ratio, the measures a lender uses to qualify you, and it says nothing about a particular household's payment. A homeowner renewing a large balance from a 2021 rate can face a sharp jump while the national ratio barely twitches.

Why RBC calls it a floor

RBC treats 14.5% as the bottom of a reprieve rather than a new normal, for two reasons.

The first is technical. Part of the drop from the first quarter to the second came from a temporary income boost: Indigenous settlements and a one-time HST rebate that RBC expects to unwind in the third quarter. Inflate the denominator for a quarter and the ratio looks better than underlying conditions.

The second is structural. Debt renews with a lag. Each month, more mortgages roll from older contracts onto today's pricing, and new borrowing is booked at today's rates. Heading into 2027, RBC expects debt payments to grow faster than disposable income again, pushing the ratio gradually higher, even though overall household debt relative to income is not unusually high.