Debt to income ratio Canada – what is a good ratio?

Posted on 28 May 2022

Written by Chris Galea

With household debt to income ratio in Canada at an all time high, now is a good time to be thinking about your own debt to income ratio. This peak indicates a drop in the average Canadian’s household disposable income, but a drastic increase in overall debt. Coupled with rising interest rates, this can be a threatening situation for many Canadians struggling with overwhelming debt. Anyone finding it difficult to make the minimum payments on their debt will not likely be thrilled to hear that their debts are due to become even more expensive. Debt to income ratios are tracked by the Canadian government – after all, if they grow, it is likely to have a negative impact on many Canadians’ financial health. You too will want to keep an eye on your debt to income ratio. It is a key factor that lenders and financial institutions use to determine whether or not to approve a loan. A high debt to income ratio can suggest risk in defaulting on loans, and financial vulnerability. In this article, we explain what a debt to income ratio truly is, and what yours means for you and your finances.

What is a debt to income ratio?

A debt to income ratio is a way of measuring the overall debt you hold against the overall amount of disposable household income that you have. It is a measure used by banks to provide a snapshot of your overall financial situation, and to determine how much of a risk you pose to lenders and financial institutions. If you are looking to take out a large loan like a car loan or a mortgage, you may therefore want to keep a close eye on your debt to income ratio in the time leading up to your major purchase. A debt to income ratio will factor in all of your debts, from credit card debts to personal loans, and so on.

How do you calculate your debt to income ratio?

It is pretty simple to calculate your debt to income ratio. All you need to do is add up all of your independent debts, including any mortgages, car loans, credit card debts, payday loans, student loans, and so on. Your income refers to any money brought in by yourself or your spouse, any child support you receive, and any pension you may be eligible for. You then divide this amount by your annual gross income before other deductions are made. The calculation is pretty straightforward to make, and this will give you your debt to income ratio. Typically, you will land at a percentage, or a dollar quantity of debt owed per dollar of overall income. The lower this figure is, the more favourably most financial institutions will view your situation. If your ratio is over 100%, it means that the amount of debt you owe is greater than your income, which probably means you need to find a form of debt relief immediately. Generally speaking, a healthy debt to income ratio is anything below the 40-45% benchmark. Ultimately, the lower the better.

Why does a debt to income ratio matter?

If you have concerns about your financial status, you should pay close attention to your debt to income ratio. If throughout your life, your debt to income ratio is consistently high, it could lead to serious financial difficulty. You may struggle to ever repay your debts, or to meet your financial goals like taking out a car loan or getting a mortgage. It could affect you later in life too, especially in retirement. At Spergel, we believe in helping to provide a fresh financial future for all the individuals we work with. Our reputable Licensed Insolvency Trustees have over thirty years’ experience of helping Canadians gain debt relief, through various measures from debt consolidation loans through to consumer proposals and bankruptcy. Of course, if you have recently made an expensive purchase like a condo in a Canadian city like Toronto or Vancouver, you can expect to have a debt to income ratio that is higher for a little while. If this is the case, however, you should work to reduce it however you can. This is often done by finding more income, perhaps through a second job, or by repaying your debt. Paying off your debt is usually the quickest way to lower your debt to income ratio. A low debt to income ratio matters when it comes to borrowing credit. It is more appealing to financial institutions and lenders as you will be less of a risk for not repaying your loan in full. Your debt to income ratio also affects your overall credit score. By having a high amount of debt, your credit score will naturally be negatively affected. This is because it suggests you pose a greater risk for defaulting on your debt payments, and you are therefore less likely to be accepted for credit or loans.

How can you improve your debt to income ratio?

No matter how bad you may think your debt to income ratio is, the good news is that you are always able to improve it. Improvements can be made simply by lowering your overall debt, or by increasing your income. In the best case scenarios, you will be able to do both. Many Canadians, however, find it easier to cut down their debt through tactics like reducing credit card debt. Of course, some common sense must be taken into consideration. If your debt to income ratio is worse because you have recently bought a property, it is different to being overwhelmed by multiple credit card debts and payday loans for several years. Here are some top tips for improving your debt to income ratio:

  • Avoid relying on credit cards for day to day expenses, instead learning how to budget with cash
  • Take out a debt consolidation loan if you have multiple credit cards to reduce your overall interest rate and simplify payments
  • Live within your means and consider your assets accordingly, including a property and a car that you can truly afford
  • Sell any assets that you do not use and put the money towards your debt repayments
  • Find a second job or side hustle to increase your income

If you have more questions on your debt to income ratio, book a free consultation with Spergel. Our experienced Licensed Insolvency Trustees can assess your ratio and advise you on what needs to be done to improve it. We offer various forms of debt relief, and can recommend a pathway to you to help you begin a fresh financial future. Reach out today – you owe it to yourself.


Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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