What does the debt-to-income ratio really mean?
Does this ratio deserve all the media the attention it is getting in the local news? “For every $1 of household disposable income, Canadians have $1.68 in debt”. In a nutshell this ratio means that for every $1 you earn, you owe $1.68. It seems like a startling figure but is a cause for concern?
It is important to know how the ratio is calculated. Debt is all outstanding debts (i.e. Credit card balances, student loans, auto loans, mortgages, etc…). Income is disposable income (income after taxes). $100,000 of income, taxed at 25% leaves disposable income of $75,000. With debts of $100,000 the debt-to-income ratio will be $1.33 or 133% ($100,000 divided by $75,000). With a $200k mortgage (average Canadian Mortgage), your debt-to-income ratio would be $2.67 or 267%.
Why this ratio is given too much credit (pun intended):
· Over time if your income remains the same and your debt reduces (i.e. a mortgage) while your debt to ratio may initially be high – it will reduce over time. If you are taking on credit card debt or other “bad” debt at high rates of interest your ratio could increase in time.
· It does not take into consideration assets. I.e. Two different individuals with $75,000 disposable income and $500,000 in debts would have the same debt-to-income ratio. If one has $1million in savings/equity while the other only has $100,000 – one is in a better financial situation, yet the ratio says they are financially the same.
While the debt-to-income ratio is a general broad figure for Canadian consumers there are more illustrative and useful ratios to consider. For example, the monthly income-to-monthly debt ratio compares how much you earn per month compared to how much you are paying out to debts. This simple cash flow analysis assists with practical uses like budget creations.
The Equifax Security Breach – are you at risk?
In other news, you may have heard about the Equifax security breach in the United States. While most of the breach occurred with American client data, Equifax advised that some Canadians may have had “limited personal information” breached and their website currently states that “it was determined that personal information of approximately 8,000 Canadian consumers was impacted.”
You can check if your personal information has been compromised at www.equifaxsecurity2017.com or by phone @ 866-447-7559 for more information.
Thank you for once again helping me to achieve Summit 20 – top 20% standing Nationally with The Mortgage Group.
Mortgage rules are changing… new guidelines that will make it harder to qualify are expected to be announced at the end of October, with implementation in early 2018. If you are considering purchasing or refinancing I recommend acting now as these changes may affect your plans.