The Great Debt Myth
For years now I have been reading articles in various publications the latest of which was published in the Globe and Mail (Rob Carrick) last week putting fear into all Canadians with respect to the Debt to Income ratio. At first glance, the current debt to income ratio of 1.67:1 evokes fear.
Wow, that is scary.
However, if you read between the lines and actually look at what is included in this ratio there is nothing to fear at all. This is because it includes mortgage debt and without mortgage debt included that number would probably be under 0.5:1.
Why is this significant?
Well, if you do not have a mortgage of $1500 per month what do you have? Rent of $1500 per month, unless you are planning on living in your parents basement. Either way, it has to be paid. Mortgage or Rent, that is the question. If you own, half of your mortgage payment is equity which is a forced saving plan for you. If you rent, that money is a forced saving plan for our landlord and you end up with nothing in the end. Of course we all start out renting but owning is always better in the long term. So, would it make sense to say that if all Canadians sold their properties to foreign investors and we all then rented those homes back from those foreign investors the debt ratio would decrease to say 0.5:1 and we as Canadians would be much better off? Of course not, that is completely ridiculous. The only path to retirement is to own the home you live in otherwise you will never retire. Responsible mortgage debt is a good thing. Other debts like Credit Cards are not. I think it is important that this statistic which has been misunderstood and misused over and over again to scare Canadians out of making important financial decisions is carefully examined and in the end exposed for what is really is, a myth!