# My Debt to Income Ratio is Higher than 153%: But That’s Okay!

Experts will tell you your debt-to-income ratio is one of the best ways to gauge your financial position. The media often quotes the Bank of Canada saying Canadians are at dangerously high levels of debt at 153 per cent. But what does that mean? I’ve spent countless dinner parties arguing how to properly calculate debt to income ratios and how can you tell if your in the danger zone. There are many schools of thought on how to asses your financial health.  Here are a few.

Start by calculating how much fixed costs (debt) you have every month. These are costs you would pay even if you were away on holiday all month. This includes, mortgage, car payments, insurance, utilities, property taxes, minimum credit card payments and minimum student loan payments. Then calculate how much money you bring in as a household in one month. Your salary, your spouse’s income and any money you make from investments.

Take the first number (your debts) and divide it by the second number (your income) and multiply it by 100.

Experts say, ideally you want this number to be less than 30 per cent. If you’re between 30-40 per cent be careful where you are spending your money and if you’re creeping close to 50 per cent. You may want to cut back on some of your fixed living expenses.

This is the debt to income calculation Statistics Canada uses to come up with that scary 153 per cent figure. Take your total debts, home loan, car loan, line of credit and credit card debt. Calculate how much money you would need to say “I’m debt free!”

Take that number (total debt) and divide it by your total annual household earnings after taxes (total income) and multiply it by 100.

Experts will say, if that number is under 130 per cent you are in good shape. 130-140 per cent you are in a vulnerable position. More than 140 per cent is getting close to the danger zone and more than 150 per cent means you’re operating at a debt level that would be hard to handle if interest rates were to rise 2-3 per cent.

## Sorry! One more ratio

Canadians also need to look at their debt to asset ratios. This means the ratio of how much money you have if you sold everything compared to your total debt or liabilities.

Calculate all the debt you have outstanding. How much is left on your mortgage, credit cards, pesky line of credit and heck even your library dues. Who do you owe money to right now? Jot it all down. Then, add up how much your assets are worth,  your house, car, stock portfolio any other investments, even your 60 inch T.V! Anything you own with a re-sale value. Imagine you’re moving to Argentina to start a new life and you had to sell it all.

Take how much you owe to everybody (total debt/liability) and divide it by how much your stuff is worth (total assets) and multiply by 100.

Again, experts say the higher the number the fewer assets you have to back up your debts and that’s not very good. For example if you total assets are \$1,000,000, but you owe \$900,000. You ratio is 90 per cent. You have little equity in your home and you’re the fakest millionaire around. But on the other hand if you owe \$100,000 but your assets are worth \$250,000 you are well backed by the equity or assets you already have in your home.

## No need for online calculators

I’m not going to give you a link to any online calculators, because this is easy math that most of us can figure out and frankly most of the calculators make the situation more confusing. If you do the math yourself it will help you understand where you may be spending too much and what these numbers really mean.

## The better ratio

In my opinion the better ratio is the one that calculates your ability to service your monthly debt. That is the number most banks use to understand your ability to pay your mortgage

But that does not mean you should take a \$1,000,000 loan just because the bank says you can afford the minimum payments. Calculate your affordability based on at least 2-3 percentage points higher in interest. This is the best way to protect your financial health.  Even if you’re on a fixed rate mortgage it means when your mortgage renewal comes up and interest rates are higher, you’re already well positioned to make those higher payments.

## But my ratios are so high! Don’t worry so are mine

• Rubina’s household ability to service monthly debt: 50 per cent
• Rubina’s total household debt compared to income: 190 per cent (OMG)
• Rubina’s household debt to asset ratio: 44 per cent (yikes)

But, my husband and I are in our 30s. We pay our loans at a rate 3 percentage points higher than what the bank wants us too. If we were to lower our payment to the minimum, our monthly ratio would be lower as well. Also, we have no “bad” loans like credit cards or expensive lines of credit. We own our car and are conscious about our variable spending, so our ratio of household debt compared to income is decreasing every month. Finally, we bought our house two years ago and this is the most debt we will ever be in, as time goes on our debt to asset ratio will improve.

On top of this we’re well prepared, in the last year we have built a 6 month rainy day fund and we both have substantial retirement portfolios and good job prospects.

You need to take all of this into account when you calculate your own affordability. The ratios are important, but always put them into perspective with your unique situation.  Never live beyond your means.

## 5 thoughts on “My Debt to Income Ratio is Higher than 153%: But That’s Okay!”

1. Mark says:

I am not understanding the debt to income ratio noted above. After tax income for my wife and I is 100k. Our mortgage is 187k. Does this really mean 187% debt to income? If so then the only thing to do would be to make more than 160k in salary.

2. Toronto says:

You are right. But do not forget that the ratio is calculated using total consumer debt / national household income. It means that 153% is an average. It is scary as it shows a vulnerability should any economic downturn arise. Many countries with levels above 140 have fallen into recession.

Being an average it takes everyone, even those who do not have mortgage or credit card debts. Think about national income. It does not mean that everyone makes that amount of money.

3. Mike from Stouffville says:

Sorry Rubina, I think you’re sending the wrong message here. It is not okay to be in over your head just because rates are low. You wouldn’t be saying its okay if mortgage rates were at 5+%.

Folks, pay down your debt and don’t have more then one credit card. All signs are showing to rising interest rates. Step 1 – Flaherty made changes to the mortgage rules and it seems to be working, but some are still not getting the message.

Step 2 – Expect at least .25% increase in the overnight lending rate, which means the Banks’ prime rate will be 3.25%. Fixed rates usually go up prior to an increase. Watch for these signs.

Step 3 – Once the downtown condos are complete, watch for a correction of at least 5%… at least! Think of your house value going down 5%.

Keep a budget, very important, or start one if you don’t have one. You’ll be surprised where your money is going. Create a needs vs wants list. Remember your retirement plan when doing this list.

I’m in the field, and just looking out for people’s best interests. Just had some young couples with small kids get out of a bad situation with their debt. Scary what’s happening out there.

4. Chris says:

I have no debt and all I have is my monthly running bills like everyone else, my wife and I manage to live on less than \$3,000/month. I have cash and assets worth over \$4.0mm and I worry, yes folks I worry. I really don’t know how young people survive in Canada, the taxes kill the working person, running costs including insurances and utilities and gas for the car(s) nearly kill them completely. Food prices are outragiously high, clothing, most of which is imported from Communist China is sold at exhorbently high prices for the quality, people in Canada are taken for a ride and the local, provincial and federal govnerments are doing nothing to help the young Canadians, the ones who will be ruling the country in 30 years from now. Think about it.

5. Chris says:

What I learned in economics class in college was never be in debt more than one year’s gross salary, use that as a rule of thumb and you will always be ok.