Chart of the Week: Cost of Consumer Debt Divergence

Chart Cost of Consumer Debt Divergence 5 11 18

Total debt service as a percentage of disposable income has remained quite low the last few years, despite an increase in absolute debt levels. This is due to the fact that interest rates have been near record lows during this time.

As interest rates have started to rise, you have begun to see debt service costs for Other Consumer Debt (auto loans, credit cards, etc.) begin to rise. However, the total has largely been held lower because the service cost on mortgage debt is slower to respond to a rising rate environment due to the longer-term, fixed-rate nature of most mortgages. Although non-mortgage debt is a much smaller piece of total household debt, the responsiveness to rising interest rates will continue to increase the total service cost burden on consumers. Furthermore, as more mortgages are originated at higher interest rates, the contribution to debt service from mortgages will also begin to rise. In sum, over time we expect higher interest rates to begin to eat into consumers disposable incomes, and this is something that we are watching very closely.