Pull in that debt load!

I was reading the paper this morning and saw a rather concerning title: Canadian household debt  burden rises to record level.

What this story talks about are recent stats released by Stats Can that show a wide (very wide) gap between debt load (which in this case includes mortgages, consumer credit and non-mortgage loans) and disposable income. Currently, Canadians hold a 162.6 percent debt load against their disposable income.

What???

Just because you can, doesn’t mean you should

What these stats comment on rather loudly is the growing appetite in our society for the buy-now, pay-later mentality. While immediacy has its gratifying points, swelling debt loads have far greater longer term ramifications.

The problem here is complacency. Because interest rates have been so low for so long, many average consumers have become conditioned to a false sense of financial security. And rest assured, interest rates will go up at some point.

Set your own limits

Just because the bank increases your credit limit, doesn’t mean you should utilize it. Unless your income has increased in tandem (and when does that happen?), your debt-to-income ratio should stay the same- within a comfortable range. While a lender typically uses a 40 percent debt-to-income ratio for credit approval, you should make it your practice to be well below that (like half, at least).

Mortgage pre-approval

In the same vein, when shopping for a house, recognize the difference between your mortgage “budget” and your mortgage pre-approval.

Your mortgage pre-approval is a tool to get the ball rolling in a hurry if you find a house that meets your needs. It’s not the upper end of your budget.

Don’t forget interest rates are going to go up at some point, which is going to increase your mortgage payments. Also don’t forget about homeowner costs, like repairs etc. that you may not be anticipating.

What if?

You cannot control what may happen to you in the future (i.e. job loss or other unforeseen financial hardship) but you can control your financial situation in the present by limiting your vulnerability through excessive debt.

Restraint is your best bet towards controlling your financial future.