The Ambiguity With Canadian Household Debt

The average measure of household debt was just published, and - as usual - it has caused quite a stir.  Canada has hit a record high of 151%.  This means, that for every $1.00 we make, we owe $1.51 on.  Debt is considered to be your credit cards, loans, mortgage, etc....Sounds scary, right?  Well, it shouldn't be.  An incredible 58% of Canadians have credit scores of over 700, with only 15% having scores lower than 600.  This tells us that Canadians have enough money to pay and maintain their debtors.

The methodology behind the 151% is ambiguous, and an inaccurate display of the state of the Canadian household.  What this figure does not account for is the lifespan of the debt.  Let's go back to 7th grade math.  Let's use an example of an annual income of $100,000 with debt of $151,000.  The calculation would be: 151,000 ÷ 100,000 = 1.51.  However, because we know that the income is based on 1 year, the equation should truly look like this: 151,000/? ÷ 100,000/1 = ?.

Considering that this figure includes your mortgage, let's take this in simple terms.  The average mortgage has a 30 year amortization (they calculate your monthly payments based on the entire amount spread over 30 years).  For simplicity sake, let's say your entire debt is a mortgage for $151,000.  So, using the same example, the true calculation should look like this:  151,000/30 ÷ 100,000/1 = 5033.33 ÷ 100,000 = 0.05.  So, theoretically, the average measure of household debt should truly be 5%.

My example of course, is ambiguous because I'm making a lot of assumptions - it's difficult to take an accurate measure of Canadian's debt, and the time they have left on their respective terms.  There are, however, way more effective ways to gauge what the true number should be.

When you apply for a mortgage, car lease, line of credit, etc... creditors look at your Total Debt Servicing Ratio (TDSR).  For mortgages, if you have a credit score of 680 or more, creditors require for your TDSR to be at a maximum of 44%.  What this means, is that they will gladly finance you if your mortgage and debts equals to less than 44% of your income.  This is looked at based on monthly payments.

Essentially, the most accurate way to measure the average household debt would be getting an average Canadian TDSR - what you pay, versus what you make based on the same time frame.