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How Much Debt is too Much?

November 2, 2018 Uncategorized

Just how much debt is too much?  You’ll surely know when you start to pay it back.

Currently, Canadian Chartered Banks have no expectation that you will ever repay your debts, in fact they want you to remain in state of perpetual debt.  We have blogged about the effect of making only minimum monthly payments ad nauseum, so let’s stay focused on the actual amount of debt.

Debt Service Ratios:

There are two debt service ratios that are used by banks and other mortgage lenders, Total Debt Service Ratio (“TDS”) and Gross Debt Service Ratio (“GDS”).

The TDS ratio is the percentage of income needed to cover all your debt payments. The debt ratio formula calculation takes into consideration all debts owed and includes housing costs. These debts include car payments, credit cards, alimony, and any loans. The industry standard for a TDS ratio is 48 per cent.

A GDS ratio is the percentage of income needed to pay all monthly housing costs, including principal, interest, taxes, and heat (PITH). It includes 50 per cent of condo fees, when applicable. Most lenders abide by a general standard of 38 per cent, so your GDS should be lower than that to qualify for a mortgage.

More than half of Canadian’s reporting incomes earned less than $2,300 per month.  If they maxed out their TDS they would be spending $1,104 on housing and credit management that would mean they need to be able to live on about $1,196 per month after paying housing costs, including heat.

Here’s what the household budget might look like.

Expense Item Cost per month
Rent (in TDS) $0
Hydro $150
Gas Heat (in TDS) $0
Cellular $30
Internet $100
Cable TV $80
Tenant Insurance $45
Transit $81
Food & Groceries $350
Clothing $20
Haircuts $20
Entertainment $85
Gym Memberships $20
Eating Out $25
Alcohol $25
Gifts $25
Total $1,056