Signs of Over-Indebtedness: Self-Diagnosis and Key Ratios

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Recognizing the Signs of Over-Indebtedness

Over-indebtedness does not happen overnight. It is a gradual process where financial obligations progressively exceed repayment capacity. In Canada, households allocate on average more than 14% of their disposable income to debt service, one of the highest ratios among G7 countries. In Quebec specifically, insolvency rates are regularly above the national average, partly due to the high cost of living in major metropolitan areas and broader reliance on consumer credit.

Debt Ratios: Your First Indicator

The total debt service (TDS) ratio, used by OSFI in Guideline B-20, is the benchmark measure for evaluating indebtedness. This ratio compares all your monthly obligations (housing, credit cards, loans, lines of credit) to your gross income. OSFI sets the maximum threshold at 44% for mortgage qualification. However, a TDS ratio of 35% or below is considered healthy by most financial advisors. Beyond 44%, the financial margin is too thin to absorb unexpected events.

TDS below 35%: healthy situation with good financial flexibility.
TDS between 35% and 44%: caution zone; mortgage qualification is possible, but the margin for error is slim.
TDS between 44% and 50%: risk zone; A lenders deny qualification, B lenders accept at higher rates.
TDS above 50%: likely over-indebtedness; professional consultation recommended.

Behaviours That Signal a Problem

Beyond ratios, certain daily behaviours are reliable indicators of over-indebtedness. The AMF-certified mortgage broker must be attentive to these signals when analyzing the client's file, as they often reveal a more concerning situation than the numbers alone show.

Paying only the minimum on credit cards month after month, meaning the principal barely decreases.
Using a credit card or line of credit to pay for everyday expenses (groceries, gas, bills) due to insufficient cash flow.
Transferring balances from one card to another to take advantage of temporary promotional rates, without a real repayment plan.
Regularly requesting credit limit increases or new financing facilities.
Avoiding opening bank statements or creditor letters due to anxiety.
Borrowing from family or friends to cover regular financial obligations.

The Mortgage Broker's Role Facing Over-Indebtedness

The AMF-certified mortgage broker in Quebec has a clear ethical responsibility under the Act Respecting the Distribution of Financial Products and Services (LDPSF). They must act in the client's best interest, which sometimes means recommending against proceeding with a mortgage application. When financial analysis reveals over-indebtedness, the ethical broker will direct their client toward appropriate resources: a Licensed Insolvency Trustee (LIT) to evaluate legal options such as a consumer proposal, a budget counsellor at an ACEF to establish a realistic budget, or a financial planner for a medium-term recovery strategy. Taking the time to resolve over-indebtedness before committing to a mortgage is the most responsible decision a borrower can make.

Frequently Asked Questions

What are the main signs of over-indebtedness?

The most common signs include: paying only minimums on credit cards, using credit to cover daily expenses (groceries, gas), juggling between credit cards, receiving creditor calls, having a TDS ratio above 40%, having no emergency fund, and avoiding reviewing financial statements.

How do I calculate my debt ratio?

The TDS ratio is calculated as follows: (total monthly debt payments, including mortgage, taxes, heating, auto loans, credit cards at 3% of balance, lines of credit at 3% of balance, student loans, and other obligations) divided by gross monthly income, multiplied by 100. A result above 44% exceeds OSFI's threshold.

What is the mortgage broker's role regarding over-indebtedness?

The AMF-certified mortgage broker is obligated, under the LDPSF, to act in the client's best interest. If the financial analysis reveals over-indebtedness, the broker must communicate this clearly and may recommend resources such as ACEFs (cooperative family economics associations), a Licensed Insolvency Trustee, or a budget counsellor before proceeding with a mortgage application.

At what point should I consult a professional?

Consult a professional as soon as you notice two or more of the following signs: regular payment delays, using credit for everyday expenses, TDS ratio above 44%, denied credit applications, and constant financial stress. In Quebec, ACEFs offer free budget management consultations.

Does over-indebtedness prevent me from getting a mortgage?

Not necessarily, but it significantly complicates qualification. A TDS ratio above 44% excludes A lenders compliant with OSFI's Guideline B-20. B lenders (alternative) accept higher ratios but at higher rates. An AMF-certified broker can propose a financial recovery plan to enable qualification within a reasonable timeframe.

What resources exist in Quebec for over-indebted individuals?

Quebec offers several resources: ACEFs for free budget counselling, Licensed Insolvency Trustees (LITs) for consumer proposals and bankruptcies, voluntary deposit (article 652 of the Code of Civil Procedure), and community financial assistance organizations. The AMF maintains a registry of authorized professionals.