An important goal is to eliminate debt before retirement. Not everyone will succeed, but we can expect the debt-to-income ratio for retirees to be low. Young people buying a house tend to start with large mortgages and smaller incomes than they will have later in life. It’s normal to expect that debt-to-income ratios will be higher among the young than the old.
So, young people whose ratio is higher than the national average can relax. But don’t relax too much. Today’s low interest rates make it far too easy to build huge debts on a modest income. Boomer and Echo use the following example.
“If you’re the median Canadian household who brings home $5,500 a month, you should keep your monthly debt payments under $2,200. This sounds pretty reasonable.”Let’s assume that the debt payments in this example are split 80/20 between a 3% 25-year mortgage ($1760/month) and a line of credit ($440/month). This corresponds to a $371,900 mortgage, and if the LOC payments are 2% of the balance per month, the LOC balance is $22,000.
This household has a total debt of $393,900 and a yearly income of $66,000, for a ratio of 597%! I think this is crazy. A household in this position should be worried about possible interest rate increases, job loss, or a drop in their home’s value if they need to move.
It’s true that the national average debt-to-income level isn’t a good yardstick for young people, but being too far above this average figure is dangerous. Instead of trying to have everything at once, try easing slowly into a higher-consumption lifestyle. It’s possible to be happy with a modest home and a used car.