How Much Mortgage Debt is Too Much Debt?

The Canadian government is concerned about our level of consumer debt, including mortgage debt, and so are most Canadians.  When surveyed however, the vast majority of Canadians feel comfortable with their own level of debt.  The question remains, how much debt is too much debt.

The yardstick our Department of Finance has been using is the ratio of debt to disposable annual income.  Let’s look at that at the household level.  A couple earning $100,000 per year would bring home a disposable income of $82,000 in Ontario.  At the current record high ratio of debt to disposable income of 163.4%, this couple would have total debt in the amount of $134,000.  Given the price of real estate and the size of the mortgages needed to purchase these homes, $135,300 is actually a small mortgage for a young couple.  For a couple approaching retirement however, this is a high amount of debt.

The yardstick used by the Canadian Mortgage and Housing Corporation (CMHC)  to determine maximum qualifying debt payments is 40% of gross income.  In other words our couple earning $100,000 per year could handle  maximum monthly debt payments of $3,333 per month.  If they had no other debt, this would allow them to carry a mortgage of over $550,000 at today’s 5 year fixed mortgage rate of 3.69%.  Although this is a a high debt load by any yardstick, it’s become a necessity for anyone looking to get into the real estate market with only a 5% downpayment.

Rather than judging your debt load by one macroeconomic indicator you need to consider your individual financial plan and the number of years until you retire.  Further, you need to separate your mortgage debt from your consumer debt.  Any credit card debt is too much debt and should be paid off as soon as possible.  Mortgage debt, however, is offset by an appreciating asset and depending on your income and location stability can be assumed with confidence.  If your uncomfortable with your debt levels speak with a certified financial planner or an accredited mortgage professional (AMP).

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