There has been a lot of articles over the past few months discussing Canadian household debt. Most of the articles discuss how household debt is getting to worrying levels, with the fear of a Canadian meltdown similar to the US meltdown happening. Most of the articles discuss household debt in terms of a debt to income ratio, which on average for Canada is sitting at 151. I have had a hard time understanding this ratio – is it before tax dollars, after tax dollars, does it include all debt etc. What the government has been concerned about is that this ratio keeps increasing with the fear that it will hit 160, which is the debt to income ratio that the US was at when the meltdown occurred.
I have finally read an article from the Globe and Mail that explains the ratio. The ratio is for every dollar of after-tax cash, the average Canadian family owes $1.51, including mortgages, credit cards, credit lines and car loans. What I have never understood about this ratio, is that it doesn’t seem to make a lot of sense for people that have taken on a lot of debt but are able to pay it off, like first time home buyers. A new home buyer will likely have a really high ratio due to the mortgage they’ve just taken on, which means their debt to income ratio will likely be well over the 151 mark. That being said, if they are perfectly capable of paying their mortgage payments, this ratio seems to mislead towards doom and gloom when the family can be in a perfectly healthy financial state. I like how this article has actually addressed that, with it pointing out that although Canadian debt to income is high, this metric doesn’t show the whole story as to whether Canadians are able to pay off their debt.
Our household debt to income level is right now sitting at a whopping 2.72. Having read numerous articles that cites this ratio, I’ve always been left with a sense of unease that our debt to income level is so high about the average. That being said, the bulk of our debt is mortgage debt, which we’re not only able to pay our weekly payments, but we’ve been in a place where we’ve been able to put down added pre-payments to hit our 10 year mortgage plan. When we first took on our mortgage, our debt to income level was up at 3.62, well over double the Canadian level. In my eyes the debt to income ratio is something to be aware of, but absolutely does not tell the whole story. My unease has been quietened that although our debt is high, we are still in a decent place to get rid of it.