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While the Bank of Canada is likely close to wrapping up its current round of rate hikes, the effects of higher rates are only starting to bite Canadian households, says TD Economics in a new report.

Following the central bank’s latest rate decision, TD expects just one more hike of 25 basis points, which would take the overnight rate to 4.5%, up sharply from 0.25% in February.

“While interest rates have been rising since the start of this year, the impact on households’ bottom lines has only just begun,” the report said, noting that debt service costs will continue to rise as mortgages and other loans are renewed at current rates.

Rising borrowing costs have already started to weigh on the housing market. “As glaring as those changes have been,” TD said, “much of its impact on borrowers is yet to come.”

In the third quarter, the debt service ratio was up to 14% of disposable income from 13.3% in the first quarter of 2022, TD reported. It expects the ratio to hit a record high of 16.1% by the first quarter of 2024, as more loans reprice.

“The debt service ratio is likely to rise by another two percentage points, eclipsing the pre-pandemic peak by the second half of next year,” the report said.

As debt service costs soar, households will likely curb spending and saving, it said.

“We expect consumer spending growth to stall over the course of 2020 and much of the excess saving built up during the pandemic to be drawn down by the rise in debt service costs,” TD said, with these trends weighing on economic growth.

Household borrowing is also expected to slow sharply to under 2% year-on-year by the end of next year, TD said, down from 7.4% in the third quarter of 2022.

“Mortgage credit growth will lead the slowdown, but consumer credit will also lose momentum as spending on durable items — such as appliances and furniture — slows and renovation activity eases off, reducing demand for home equity lines of credit,” the report said.

Many borrowers may also extend their amortizations in the face of higher debt service costs, keeping payments manageable but increasing the total cost of borrowing.