March 19, 2018
It is a tool used by banks to determine if you are able to repay a loan that you would like to obtain.
To calculate it, they add housing costs with the monthly payments on your debts and then divide that sum by your net income.
You can calculate your own debt ratio in 10 minutes by visiting:
In no time, you will find out if your debt level is reasonable or if you need to make your budget leaner.
At 36%, your debt level will allow you to borrow, but as of 40%, financial institutions will refuse to grant you a loan, barring special circumstances. The limit is therefore close.
The limitations of this calculation tool:
This ratio has the advantage of being a universal calculation tool. It also has the advantage of being relatively simple to calculate but it has a major weakness that should not be overlooked: it doesn’t take into account the number of dependants. In fact, a single person making a gross salary of $100,000 per year won’t have the same food, schooling, clothing, etc. needs as a family with 2 children and where both parents work (thereby incurring costs) and each make $50,000.
You should therefore take this factor into account when you evaluate your result. A single person’s 36% leaves more wiggle room than the 36% of a family with 2 kids, as the single person requires less money to cover their base costs and consequently has more money left over to reimburse their debts.
Every 6 months:
A good result is great, but it is important to stay on course medium-term. A score of 36% that drops after 6 months is better than a 34% score that is on the rise. Given that the majority of people who find themselves with financial difficulties never saw it coming, it is better to recalculate your ratio every 6 months (in January and after the summer break) to ensure that the situation is holding up or, even better, is improving.
If you need help, don’t hesitate to contact us. It will be our pleasure to answer your questions.