On the Huffington Post website today is an article about the CEO of TD recommending tighter mortgage lending rules be implemented to discourage what he perceives to be high household debt to income ratios.
Household debt to income soared to a record of 164.1 per cent in the third quarter of last year, but fell slightly to 163.2 per cent in the first quarter. That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year compared with $1.64 at the end of last year.
The idea of Canadians having high levels of household debt is not a pleasant one. However, I think it calls for some context.
- What the statistic says is that for a family that has a gross income of $100,000, that they will be on average carrying a mortgage of $164,100. According to this CBC article, the average home is worth just over $398k. That represents a loan to value ratio of about 42%. That is the average. That is actually quite good.
- Using an average market rate of 3% and a 25 year amortization, that average family would be looking at a payment of $621/month, of which only $326 is interest. Who really believes that interest charges of $326 to own and service a loan on your home is being reckless…besides the TD CEO?
- If TD believes that their policies are too aggressive and want to change them, then they should change them. They evaluate the market constantly and make policies they see fit to ensure profitability.
- TD offers high interest credit cards. How much credit card debt, at an interest rate of 20%, would it take to have monthly interest charges of $326/month? By my calculations, it is only $19,560. I never see statements in the media from chartered banks about how unsecured lending practices should be tightened to ensure economic stability. Why? Because those products are extremely profitable to them, and mortgages are much less so.
I have a lot more to say about the problems here, from the values that we have as a society towards spending and about the lack of education on personal finance management we receive. However, I think this is a good example of the media being used as a tool for fear-mongering. The statistic sounds bad, but it is misdirection.