How much debt is too much?

As housing prices across Canada continue to rise and a 20 per cent down payment gets harder to come by, many people find themselves wondering how big a mortgage is too big.
But they are asking the wrong question, says Henrietta Ross, chief executive officer of the Canadian Association of Credit Counselling Services, based in Grimsby, Ont. Her offices helped 130,000 Canadians face their debt problems -- including mortgages -- last year.
"People should not be looking at mortgage debt but rather at their overall levels of family debt," she says. "Mortgages alone are not usually the cause of financial problems."
Her advice is spot on, say mortgage brokers Sue Pimento, east Toronto regional manager for Invis, and Sean Binkley, a mortgage broker with Mortgage Intelligence in Ottawa. Both note that debt consolidation through home refinancing is on the rise.
"People are taking advantage of those historic low mortgage rates to get rid of credit card and other debt with interest rates as high as 19 per cent," says Binkley. "The problem is they are taking short-term consumer debt and turning it into long-term mortgage debt."
The move may solve their current financial problems but it also frees them up to take on even more new debt through credit card spending and household purchases, he says.
As Pimento notes: "money is never the solution to money problems. A change in behaviour is the solution to money problems."
This is where Ross and the CACCS come in. Her members offer counselling on the phone, online ( www.caccs.ca)and in person to people struggling with creditors.
The telltale signs that family debt loads might be too high are not hard to spot. Binkley says debt consolidation through a mortgage is one. "I see people coming to me every two or three years," he says. "That is a sure sign something is wrong."
So is living on the financial edge, making minimum payments each month on bills and loans, especially credit card loans.
What are people caught in this situation to do? Ross offers a few tips to anyone taking out a mortgage. The first is to ignore guidelines offered by lenders as to what you can afford to pay. "As a rule of thumb, lenders allow you to borrow based on gross income -- up to 30 per cent or even a little more. But we don't live on gross income. We live on income after taxes and other deductions.
"You also have to remember that home ownership comes with a lot of other bills like taxes, utilities, heating, insurance and regular maintenance. That could in some cases drive the total cost of home ownership up to 40 per cent of gross income."
She says a more reasonable guide is 30 per cent of net income -- what you take home in cash to pay the bills.
Then keep all other debt to 10 per cent of net income. That includes things like car payments and credit card spending.
"Before taking out a mortgage think about the unexpected," she says.
What happens if one spouse loses a job or becomes pregnant? What happens if illness strikes and the borrower is unable to work? What happens if interest rates begin to rise?
"Many young people also carry a large burden in student loans," she says. "This obligation may mean either delaying a house purchase or opting for something less expensive."
To understand how big a mortgage you can afford, Ross suggests trying one of the budgeting calculators the CACCS offers on its website. "A lender may tell you that you qualify for a $300,000 mortgage on paper but in reality you may find your take-home pay can only support a $200,000 mortgage."