The Largest Number of Homes for Sale
How to calculate your debt-to-income ratio
How to calculate your debt-to-income ratio Many prospective homeowners or parents who want to help their child buy their first home are likely asking how they can do that themselves. It’s a crucial indicator for analyzing your financial health, as banks and financial institutions consider it before agreeing to a loan. Let’s dive in!
What is the debt-to-income ratio?
A debt-to-income ration—also known as the “debt ratio” or “debt-to-equity ratio”—is a calculation comparing your income against your debt. It helps lenders estimate your ability to repay a loan by seeing how much income is left over after paying your taxes, social security contributions and debts.[1]
Unlike your credit score, which is a snapshot of your credit history on a scale of 300 to 900, your debt ratio takes into account your current income and is expressed as a percentage.
How to calculate your debt-to-income ratio
You calculate your debt-to-income ratio by adding up all your regular payments and dividing the total by your gross monthly income. The expenses to look at are:[2]
- Rent or mortgage
- Car loan
- Student loan
- Credit cards
- Taxes
On the other hand, regular expenses like food, phone bills, electricity and transportation don’t factor in when calculating your debt-to-income ratio.
As for the income part it includes your salary, investment income, support payments (for you or a child) and any government benefits you’re receiving.[3]
The Government of Canada has a chart you can use to easily calculate your debt-to-income ratio. Feel free to use it so you can get a clearer idea of your situation.
What is a good debt-to-income ratio?
Ideally, your ratio should be as low as possible. Below 30% is excellent and puts you in a good position for loans from banks and financial institutions.[4] This ratio shows that you’re properly managing your day-to-day expenses and paying off your debts.
A ratio between 30% and 36% is good. However, a ratio of 40% or higher means more risk for lenders.[5] As a result, it might be hard to get a mortgage or repay one. In short, a high debt ratio is a red flag, meaning your debts take up too much of your personal finances.
You’ll inevitably have to calculate your debt-to-income ratio, whether you’re looking for real estate for yourself or as a guarantor of your child’s mortgage. Applying for a new loan or becoming jointly liable for someone else’s loan will impact your finances, so it’s worth thinking about!
Are you passionate about real estate? Subscribe to the Centris.ca newsletter now.
See also:
How to buy a home on a low income
