First, a few definitions:
Consumer debt: The total of money owed on items other than mortgage debt, including unpaid credit balances on bills, credit card balances, auto loans, etc., normally not including regular expenses that are paid monthly, such as phone bills, utility bills, etc.
Total debt: Consumer debt plus any mortgage/property related debt
Debt load: The total amount of money you owe
Debt ratio: The amount of monthly debt payments you have relative to your monthly income
Taking on debt depends on your personal circumstances like, how much money you earn, what interest rates apply, and how you repay the debt. Financial Institutions and lenders have guidelines and policies to follow when lending out money. Lenders want to be sure that when they provide mortgages, loans, or credit, that they are reasonably sure of getting paid back the interest and principal of the loan. The higher the risk of the borrower, the higher the rate of interest is likely to be.
In any event, there is also a limit on how much money the lender will provide, based on the following guidelines:
GDSR= Gross Debt Service Ratio: total debt payment as a percentage of income should not exceed 32% *before taxes Includes monthly expenses related to your home such as mortgage payments (interest and principal), property tax, heat and 50% of condo fees (if applicable)
TDSR= Total Debt Service Ratio: total debt payment as a percentage of income should not exceed 40% *before taxes Includes GDSR (see above) plus credit card payments (5% of limit), personal line of credit (3% of limit), personal loan (student loan, car loan, debt consolidation) and vehicle leases
If your Debt payment is greater than the recommend limits, it means you have a high debt ratio and this could indicate the debt load is becoming unmanageable. Unless your income goes up you may default or struggle to make payments. Lenders may decide not to lend to you in the future and you may experience higher interest costs.
Stay tuned for more information surrounding credit planning and debt management. We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website www.actionfinancialgroup.com.
Karin Rimnyak, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
David Dryburgh, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
Ian Barrie, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
