Managing debt to build wealth

But it’s not all bad news behind the dire headline—and there is an opportunity to help young people, in particular, understand the difference between good debt and bad debt.  

So, where’s the good news? 

Total consumer debt in Canada was $2.55 trillion at the end of the first quarter (Q1) of 2025, up 4% year-over-year. That’s a huge number—and interestingly, almost twice the federal government’s record-setting debt of just over $1.4 trillion. 

Still, that consumer debt number is down more than $6 billion from the end of 2024. While average non-mortgage debt rose to $21,859 per person in Q1 2025, there may be some valid reasons for it. 

Age is a factor in debt acquisition

Debt, statistically, is a recurring issue for younger people. It makes sense that as people age, debt reduces—particularly when it comes to mortgage debt. Still, it is surprising how long both student debt and consumer debt linger, well into pre-retirement, as shown in the below data from mid-2024.  

One of the key culprits right now, especially for young people, is a strong auto loan market, according to the Equifax Canada Market Pulse Quarterly Consumer Credit Trends and Insights Report. There may be valid reasons for this.

Car buyers appear to be reacting to the tariff tax issue, wishing to lock in their purchases before anticipated price hikes. To know if you can really afford a vehicle, do the credit math up front—and include not just the sticker price, but also the interest over the life of your car loan. How can you reduce that?  

Seeking help from a tax or financial advisor to understand whether your car loans will be tax-deductible can also help reduce the after-tax cost. Some operating costs, like gas and oil or EV charging,  and a portion of fixed costs like interest or capital cost allowances may be written off, with proper documentation, when the vehicle is used for employment or self-employment purposes. Speak to a tax specialist about that. (Also read: How to save on your taxes with automobile logs.)

The mortgage math

New mortgage applications jumped 57.7% year-over-year in Q1 2025. That’s due in large part to the number of mortgages that have come up for renewal and refinancing, many at higher interest rates. It is also interesting to note that first-time home buyers returned to the market, with activity up 40% from a year ago. 

But while average monthly payments may now be dropping due to current lower interest rates, the average loan size is increasing—by 7.5% year-over-year. It’s important to consider what the next renewal cycle might look like for today’s new debtors.

According to Bank of Canada research, 60% of those with mortgage renewals in the next two years will face payment hikes. The factors that push interest rates higher include things like high inflation, low savings rates, decreasing trade, a decrease in labour productivity, high government debt, and the risks of default. Many of those factors are in play today.

Delinquencies: They’re in non-mortgage debt

When it comes to credit delinquencies, however, financial strain is actually worse for consumers who don’t hold mortgages. In this cohort, delinquency rates rose 8.9% year-over-year, compared to 6.5% for mortgage holders. Again, younger Canadians—those 18 to 25—were hit hardest, experiencing a 15.1% increase in delinquency rates.

On the positive side, the average monthly credit card spend per card holder fell by $107 during Q1 2025, which is the lowest level since March 2022.  

Remember, not all debt is bad debt. When it comes to judging good debt vs. bad debt, there are a couple of simple but important rules:

Borrow for assets that appreciate. If you must buy a depreciating asset, make sure it is income-producing—that it helps you earn income from employment or self-employment, or from other investments like a business or rental property. 

Consider whether the interest is tax-deductible. Consumer debt, for example, is bad debt—it’s expensive and not tax-deductible. Pay it off first unless you owe money to the Canada Revenue Agency (CRA), in which case that amount owed takes precedence.

Borrowing to invest in registered accounts is not deductible. An important tax tip is that interest on loans to invest in a registered retirement savings plan (RRSP), tax-free savings account (TFSA), first-home savings account (FHSA), etc. will not be deductible. Bear that in mind in your financial planning.

Debt tips for better cash flow

Here are some effective ways to manage debt and take back control of your net cash flow:

1. Pay off high-interest, non-deductible debt as soon as possible. This includes credit card debt and high-interest loans, which can neither be written off on your tax return, nor used to build your net worth.

2. Consider consolidating debt to pay off smaller amounts first. Get rid of “debt clutter” but keep two categories: tax-deductible debt and non-deductible debt.