Numbers Don't Lie??

According to the Jan 14^th issue of “Maclean’s Magazine”, the average debt-to-income ratio of a Canadian household is now 164 per cent, higher than the pre-crash levels in the USA.

So what’s in a number? 

This calculation of this ratio is simple.  Take your current debt load (car payments, lines of credit, credit cards, mortgage, etc) and divide this by your income.  YES – your mortgage is included in this.

Let’s take one scenario about Joe. 

Joe is 30 years old and makes a $50,000 salary.  He has paid all of his student loans, owns his car outright and has no consumer debt – in fact he has saved up $25,000 for a down payment on a $150,000 condo in Kitchener, Ontario.  This leaves him with a mortgage of $125,000 that he has locked in for 10 years at 3.5%.   His mortgage payment is only $625….add a condo fee of $150 and his total payment is $775.

Sounds pretty good doesn’t it?.......except one thing…..Joe’s debt-to-income ratio is 250%  ($125,000 / $50,000) - almost 100 points higher than the (already outrageous!) national average. 

Joe must be crazy.

Here is a more detailed breakdown of Joe’s monthly income and expenses. 

Income	(after tax)	3000
Expenses
mortgage		625
condo fee		125
utilities		150
property tax		100
house insurance		70
house up-keep		100
cell phone / cable / internet		165
car insure		125
car gas		200
car maintenance		100
food		300
entertainment		300
misc		200
clothing		100
Total		2660
Monthly Savings		340

 Yes, there are some fairly large assumptions and generalities, but if Joe keeps this up and invests his $340 per month at 8% interest, he will have a mortgage free condo and $322,000 in financial assets…all this with a debt-to-income ratio that started at 250%!

Yep, Joe is nuts.