Ask the Debt Management Expert – Ken Rowan


Ask the Debt Management Expert – Ken Rowan

Debt is 165% of income!

Should I be afraid that the average adult Canadian has debt equal to 165% of their disposable income?

This stat is a little scary.  It makes us question how much debt each of us can really afford.  How do I compare to the rest of us?  How do I react to this?  And just who is the average adult Canadian?

This ratio has risen every year except once.  Wow!

Not so fast!

Since 1970, inflation-adjusted Canadian household net worth has also been on a tear.  So has household net worth to disposable income.  Except for 2001-02 and 2008-09, these measures have climbed pretty well every year.

So, when we include assets and compare them to debts, our assets are actually increasing more than our debt is increasing!

Look at debt differently

Ask yourself “how much debt can I reasonably afford?”.

About 65% of our debt is mortgage debt and 25% of all mortgage debt has variable interest rate terms.

Variable rates are even more common now, with one-third of recent mortgages being variable.

Variable rates are commonly written as prime plus a fixed amount.  When lenders increase their prime rate, payments on variable interest-rate debt increase.  If, for example, you have a $278,000 mortgage at prime plus, then if the prime rate increases by 1, your required payment increases by $145 each month.

If prime increases by 2, then your payment increases by $298 monthly!  Never mind your other debts.

Other than in a short period of 2009-10, the prime rate has not been lower than it is today.  And, at lower rates, debt is simply more affordable.  Isn’t Justin Trudeau arguing that now is the time to borrow and invest?

And this is the fear for us consumers

We might be overweight in variable interest rate debt. We may struggle when interest rates increase.

Be aware if you have a variable mortgage. Have a long term outlook and use variable interest rate financing sparingly.  Debt is expected to be repaid.  Do you have a plan to reduce and then eliminate your debt.

Try to follow these common guidelines:

  • the monthly cost of your accommodation should be less than 32% of your monthly gross income; and
  • the monthly cost of all your debts should be less than 40% of your gross monthly income.

Help is here

We help people who have excess debt move towards debt freedom and wealth accumulation.