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Recent data reveals that Canada’s middle class is increasingly grappling with the escalating cost of living, as more individuals take on debt, signalling broader economic distress. The phenomenon, often referred to as a “K-shape” economy, illustrates the growing divide between the wealthiest Canadians and those struggling to make ends meet. According to a report from Equifax, Canadians with higher credit scores are experiencing a notable increase in their debt levels, raising concerns about financial stability.
Growing Debt Levels and Financial Strain
As of the end of 2025, consumer debt across Canada reached an alarming $2.65 trillion, marking a year-on-year increase of 3.13 per cent. Non-mortgage debt alone surged by 4.5 per cent. Notably, individuals with credit scores ranging from 751 to 880 saw their non-mortgage debt rise by 6.1 per cent, indicating that higher credit ratings do not necessarily equate to financial resilience. In contrast, those with lower credit scores, between 320 and 580, experienced relatively stagnant debt levels.
Rebecca Oakes, vice-president of analytics at Equifax Canada, noted, “There’s more of a divergence happening, and a few of the higher-income or low-risk people are kind of switching almost on that ‘K’.” This divergence highlights the pressure facing households as their expenses continue to outpace income growth. Mortgage expert Clay Jarvis from NerdWallet Canada echoed this sentiment, stating, “What matters is how much income you have relative to your expenses. So if your expenses are growing faster than your income, a higher credit score isn’t going to make you any wealthier.”
Missed Payments on the Rise
The situation has worsened, with missed payments on non-mortgage debt peaking at the end of December. The proportion of Canadian households failing to make a minimum payment for 90 days or more climbed from 1.64 per cent to 1.73 per cent, reflecting a 5.43 per cent increase compared to the previous year. As Oakes pointed out, this data captures a snapshot from late 2025, and the economic landscape has shifted dramatically since then due to various global events, such as the ongoing war in Iran, which is expected to exacerbate inflation and further strain household budgets.
Understanding the ‘K-Shape’ Economy
The term “K-shape economy” describes a widening gap where high-income earners can maintain or even increase their spending, while low-income groups face diminishing purchasing power. This is evident in consumer spending behaviour; a report from November 2025 indicated that 26 per cent of shoppers planned to spend over £1,000 during the holiday season, while 46 per cent intended to spend less than £500, with 15 per cent aiming for less than £100. Oakes remarked, “Our numbers are telling us that there definitely is more concern from consumers in terms of affordability. We’re seeing that translate into spending behaviour.”
Regional Disparities in Debt Levels
The increase in debt, particularly mortgage-related, is heavily concentrated in British Columbia and Ontario. Cities like Vancouver and Toronto demand significantly higher incomes to cope with the steep cost of living, particularly in housing. Equifax reported that mortgage debt rose to £1.95 trillion in late 2025, a 2.6 per cent increase from the previous year. This rise is largely attributed to a wave of mortgage renewals, with many Canadians now facing higher interest rates than they did during the low-rate environment of 2020 to early 2022.
Oakes explained that while individuals with strong credit scores may qualify for substantial mortgages, they are now confronting “payment shock” as they renew at elevated rates. “Combine a cost of living increase with a payment shock if your mortgage is renewed at a higher rate or payment amount, and that, for some consumers, is just too much,” she said.
Economic Outlook and Consumer Sentiment
On Wednesday, the Bank of Canada maintained its benchmark interest rate for the third consecutive meeting but cautioned that the ongoing conflict in Iran poses risks to the Canadian economy. Some economists believe that if the situation leads to prolonged inflationary pressures, interest rates may need to rise further.
The overall sentiment among consumers remains grim. Jarvis remarked on the pervasive anxiety surrounding financial stability: “It’s just so hard to be positive about anything. Anyone I speak to is feeling really down, and that’s the overall sentiment regarding finances.”
Why it Matters
The escalating debt levels among Canada’s middle class signal a troubling trend that could have far-reaching implications for the economy. As households struggle to manage their finances amidst rising costs, the divide between the affluent and those in financial distress continues to widen. This situation not only threatens individual financial health but also poses risks to the stability of the broader economy. Understanding these dynamics is crucial for policymakers and consumers alike as they navigate this challenging landscape.
