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Household Debt

By on September 18, 2019

Household debt refers to the combined debt of all members in a household that are linked to lenders that require regular repayments.

While in basic language, debt can refer to any amount of money that is owed to anyone else, the term is only used to refer to the above when mentioned in the real estate industry.

This means that a loan you’ve got from a relative or an overdue bill from the telecom company does not count as household debt.

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This figure is of particularly interest in the real estate market as it gives an indication of how well a family living under the same roof is coping with mortgage payments, and whether a family looking to buy a new home would be able to afford it.

Lenders in particular, underwrite mortgages with the household debt service ratio as an indicator of how much loan a borrower can afford.

For example if the monthly income of a household is $10,000 and the current debt is $2,000, then the debt ratio is 20%. If the lender is only willing to loan up to 30% of this ratio, this means that the borrower could only afford a loan amount that requires them to pay up to $1,000 per month in mortgage payments. The loan amount can then be tabulated by factoring the loan tenure and interest rate.

In terms of loan approvals, a borrower would want to have a household debt that is as low as possible.

It must be noted that only the debt of the borrowers or co-signers would be taken into account.

So if you are living with your adult children, and they are not mortgagees, then their personal debts would not be considered even though they are part of the household unit.



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