What is your debt-to-income ratio?
What is debt-to-income ratio anyway?
It’s the percentage of your annual income (before taxes) needed to cover all your debts, including loans and credit cards.
Why does it matter?
If you’re trying to buy a house, your lender will take this into account before deciding how much to offer you, if they accept your mortgage application. Your debt-to-income ratio should be 36% or less in Canada in order for major financial institutions to consider you low risk.
There are times when money is tight and you may leverage your credit more than usual. If your debt-to-income ratio is between 37-49%, you would be considered high risk to financial institutions and may need to approach a “subprime lender” to get a mortgage. Subprime lenders usually take on more risky borrowers but they also have higher interest rates.
If you’ve been struggling financially and your debt-to-income is 50% or above, consider talking to your lender about restructuring your debt portfolio. It’s never too late to get your finances in order.
How do you improve your debt-to-income ratio?
- Pay down revolving balances as the cash becomes available to you.
- Try not to let unsecured debt rise to a point where you’re paying off debt by incurring other debt. While consolidation loans are great one-time solutions, they should not be overused.
- Consider using savings or equity in your home to pay off any large unsecured debts. To be more credit worthy, it’s better to have no debt load and no equity than a huge debt load and some equity.
- Avoid or postpone large purchases until you get back on track with your finances.
If you have any questions about your debt-to-income ratio, leave us a comment or talk to your lender!