Canada's household debt service reprieve is ending as rising bond yields push up borrowing costs. While the Bank of Canada's overnight rate affects variable-rate mortgages and consumer credit, term yields are already reshaping fixed-rate borrowing for households, businesses, and governments. According to RBC, about 70% of the increase in ten-year government bond yields since last year was driven by higher expected short-term interest rates, with the rest attributed to rising term premiums.
The household debt service ratio fell to 14.5% in Q2 2026, its lowest in four years, partly due to temporary income boosts. However, bottoming interest rates mean this relief is likely nearing an end. By 2027, growth in debt payments is expected to outpace disposable income, pushing the debt service ratio higher.
Households taking on new debt or facing mortgage renewals will feel the impact of higher rates first. Those who locked in ultra-low rates in 2021-2022 are the last cohort yet to adjust. Businesses and governments also face rising debt servicing costs, with highly leveraged entities being particularly sensitive. For governments, this could mean spending cuts, tax hikes, or larger deficits.
Rising bond yields are a larger issue in regions like France and the U.S., where concerns over fiscal sustainability are most acute. In the U.S., higher interest rates could worsen the debt-to-GDP trajectory from an already concerning baseline.