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Is Debt to Income Ratio a Real or Imagined Threat?

If one were to stop a citizen on the street and ask them if they believe today’s low interest rates have allowed Canadians to borrow more money than they should have, most will say yes. If one were to stop a citizen on the street and ask them if they believe today’s low interest rates have allowed housing prices to rise too high too fast, most will say yes. If on the heels of these two questions you then asked one more: Should government step in and tighten regulations? Most will say yes. And these citizens would be inaccurate.

We have a journalistic climate less interested in one set of numbers and more interested in another, and the relentless reporting of specific numbers while ignoring others is a problem. Nearly every news story on the topic of debt is framed in a negative light, and this is a problem. We have endless reporting of the rising debt-to-income ratio, almost always with alarmist overtones. There is never any acceptance that debt is in fact not a bad thing in the majority of households. At least not when it relates to buying a home.

Returning to our citizen in the street, let’s ask a few more questions. Would it sound reasonable to take on a $2,000 mortgage payment if your annual household income were $100,000? Do you think it’s fair to say that the same household income could support a $2,600 monthly payment? Likely we are going to get a ‘yes’ to both of these questions. Those numbers are quite reasonable in relation to one another.

Here’s where it gets a touch more interesting… That $2,000 per month payment represents a monthly payment at today’s rates on a $500,000 mortgage balance. The $2,600 per month payment represents a monthly payment at double of today’s rates when that mortgage balance come up for renewal. (using 20 per cent down on a 30-year amortization with five-year fixed-rate products – for illustrative purposes)

Our readers quick with numbers may see where this is going. That aforementioned household debt-to -income number currently reported at 167 per cent and painted as an alarmingly high – a sky about to fall number – let’s look at it in the context of the above mortgage example. That household with a $500,000 mortgage balance and a $100,000 household income, their debt to income ratio is in fact 500 per cent.

Are they freaking out?

Not at all, I mean they are a little bit – but only when they think about you and your debt to income number, not their own. Because they are concerned that today’s low rates have allowed you to borrow more than you should have – and as you know, you have not.

Canada enjoys 69 per cent home ownership, and when I say enjoys, I mean truly enjoys the benefits thereof. Home ownership provides stability to families, and thus stability to communities and by extension stability to our country. Home ownership is the thread with which the fabric of Canadian society has been woven. We are not a nomadic bunch at all, we like to stick close to our hometowns in many cases, or once we adopt a new hometown we tend to stay planted there for decades. The ability to purchase a home is a key part of that.

Half of Canada has no mortgage at all, the other half have bigger mortgages than their parents can even fathom, but then they also have larger paycheques than their parents would have fathomed. The payments are more than manageable for the majority, even if rates were to double at renewal from today’s record lows. So the suggestion that a household with a 167 per cent debt-to-income ratio is on the brink of disaster is hyperbole. If the bulk of that debt is mortgage debt, then our $100,000 per year household would have a $750 per month payment on the $167,000 mortgage.

More likely that $100,000 income household has a larger mortgage than $167,000, but not much larger than the above example, as current qualification standards limit such a household to $445,240 if they have less than 20 per cent down. This is still a 445 per cent debt-to-income ratio.

But again, how concerned are we about a household with $8,333.00 gross monthly income making their $2,000 per month payment?

As the kids say ‘Keep calm and carry on’.


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