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Dale Jackson

Your Personal Investor

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The federal government says Canada’s household debt is over 170 per cent of our annual household income. So what?

The debt-to-income ratio says very little about our actual households, and more about the bank’s ability to squeeze more money out of them. Debt-to-income is all about debt serviceability – the ability to make regular payments.

To some households, 170 is a red flag. For others, it’s a means to a prosperous end. As an example, the biggest chunk of household debt is mortgage debt. A young household with a modest income and a big mortgage will likely post a debt-to-income ratio well above 170. Sure, money is tight and interest rates are creeping up but five-year fixed rate mortgages are still under three per cent. When it comes to debt, time is the avenger. Housing values may waver over the short term, but as the years go by that debt dissolves as equity builds.

Contrast that with a household at the peak of its income-earning years nearing retirement with nothing but double-digit interest rate consumer debt. Its debt-to-income ratio will likely be well under 170 but that debt will continue to grow in proportion to income.         

Here’s how Statistics Canada calculates the debt-to-income ratio: total debt (home loan, car loan, line of credit, credit card debt etc.) divided by total annual household earnings after taxes (total income), multiplied by 100.

Debt often gets a bad rap, but imagine where Canadians of modest means would be if it didn’t exist. Like any powerful force, the key is to control it.