Dale Jackson

Personal Finance Columnist, Payback Time

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With the Bank of Canada keeping a lid on interest rates, attention once again turns to Canada’s record debt levels. The fact that the average Canadian household owes $1.80 for every dollar it takes in each year could spell trouble for older folks who have not saved enough for retirement, but for younger Canadians trying to get an equity foothold, it’s a necessary evil.

First, the debt-to-income ratio does not measure debt. It measures debt serviceability. It’s a metric that lets the banks know if those regular principal and interest payments will keep coming in.

Second, the bulk of the debt in the debt-to-income ratio comes from mortgages. For most younger Canadians buying a home outside the Vancouver and Toronto condo markets, it’s the safest way to begin building equity over the long term and the only way to borrow at a decent interest rate. According to the Canada Mortgage and Housing Corporation (CMHC) the average residential property has appreciated by more than five per cent annually over the past 30 years. That’s arguably a better return for the level of risk than the stock market. That argument is stronger when you consider the fact that you can save on rent by living in your investment, and invest in the stock market as well.

Servicing high mortgage debt can be a burden at first but good planning and discipline can quickly lower that debt-to-income ratio as household debt levels fall and income levels rise.