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Debt To Disposable Income Ratio. Is This Something You Need To Be Concerned With?

This statistic just hit a record 150.8% and has made headlines recently. The Governor of the Bank of Canada has commented on it as well. 

It might be a better idea to focus less on that figure and more on debt payments vs. income or TDS (Total Debt Servicing). TDS is the debt ratio that compares your housing costs + any other monthly payments and obligations to your income. It's also a better indicator of your ability to keep your head above the water, financially speaking. 

When applying for a mortgage the maximum TDS (Total Debt Servicing ) can usually be no higher than 40%. Meaning no more than 40% of your income should go to debt payments. Sometimes this ratio can be pushed to 42%. It might be a good idea however to have this ratio closer to 30 or 35%. Especially considering 30 or 40% today won't be 30 or 40% tomorrow. We are still in a time with historically low rates but interest rates will rise at some point. According to the latest forecasts by RBC they may go up by 1/4 percent in the last quarter of this year and by a full 1% by the end of the next (2013).
 

When interest rates go up your debt payments go up but your income doesn’t always follow.

If interest rates are now 2 or 3%, and 40% of your income is going to servicing debts today, then you could be in trouble when the rates go up. 

Fortunately research finds that only 6.5% of mortgages currently have a TDS ratio over 40%, reports the Vancouver Sun.
 

 

Your Mortgage Advisor should help you, not just in getting your financing approved, determining the best financing option, term and rate but should also open up the discussion with regards to your lifestyle. What is it currently? What will it be after a purchase of a home? And so on…

 

 

 

Tony Marchigiano | Mortgage Specialist - Mortgage Sales BC Region, RBC Royal Bank | Royal Bank of Canada | T. 604-505-7109 | F. 778-737-0054

 Source: Tony Marchigiano &  "Canadian Mortgage Trends" website.

 

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