For over a year and a half, these two have been harping about Canadians having too much debt. They are constantly reporting how our debt to income ratio is too high at 160% (despite the fact that it is now falling). This ratio is totally misleading and distorts the real level of concern. According to Equifax (Canada’s leading consumer credit reporting agency), Canadian debt payment to income is at an ALL-TIME LOW. Additionally, credit card default is at an ALL-TIME LOW. Well, how can this be? If the Bank of Canada and the Minister of Finance are correct, why is this not showing up with Equifax?
Here is why: because they are flat out misleading the public.
No credit card or car debt
Earns $70,000 per year
Bought a 600SF condo for $300,000
Down payment of 10% ($30,000)
First mortgage of $270,000 @ 3% for 5 years
Costs per month: $1350/month
Condo fees: $300/month
DEBT TO INCOME RATIO: 386%
GDS RATIO: 1650/5833 = 28%
TDS RATIO: 1650/5833 = 28%
Four years later:
Property Value: $324,729 (2% annual price increases)
Mortgage retired: $30,901
Equity increase in home = $24,729 + $30,901 = $55,630
$25,000 credit card debt
$40,000 car loan
Debt per month = $900
Rental of 600SF condo = $1750/month (actual rent)
TOTAL MONTHLY COSTS = $2650
DEBT TO INCOME RATIO: 93%
Four years later:
PAID $41,000 over 4 years on debt payment and HAS NOTHING TO SHOW FOR IT!
WHO IS BETTER OFF?
ACCORDING TO JIM FLAHERTY AND THE BANK OF CANADA, CITIZEN B!
CITIZEN A IS $96,630 RICHER THAT CITIZEN B WHO HAS NO MONEY.
HE STILL HAS CREDIT CARD DEBT AND A CAR LOAN ON A USED CAR.
You can clearly see that Citizen A will be in better shape in 4 years. If Citizen B doesn’t pay his rent, he will be HOMELESS, as will Citizen A if he defaults on his mortgage. In this case, as with many cases, rent and home payments are not very different. According to the Bank of Canada and Jim Flaherty, they want more of Citizen B. He is well below the arbitrary 160% guideline. Citizen A, according to this, is at high risk. REALLY? Is Citizen A not being responsible? His GDS/TDS ratio is very conservative. Why is this a problem?
Come clean Bank of Canada and Jim Flaherty, the Emperor is wearing no clothes.