Bad Debt, Good Debt, Best Debt?

Debt seems to be something on a lot of people's minds these days, with many thinking about taking on additional obligations due to the low interest environment we're in. Others are more worried about eliminating debt. Either way attitudes toward borrowing money are changing, so I thought an examination of debt might be of some interest.

Leaving aside the question of the bigger economic picture for the moment, debt can be divided into three basic categories: Bad, Good and Best.

automobile results in an immediate loss of about 10%...within five years the vehicle is worth maybe $10,000 if you're lucky. High interest credit card balances are obviously the worst, with the purchases often related to goods and services with zero residual value.

Good debt by contrast relates to borrowing for the purchase of things that will increase in value over the years. The best example is of course a home purchase. Home ownership is a common goal in Canadian society, and one which makes a lot of sense. It costs money to occupy a residence regardless of whether you rent or own...so why not have that occupancy cost go towards building equity. For many people their home represents their greatest source of wealth, and a retiree with a paid off mortgage has a number of options available should the need for capital arise.

Best debt is a concept that will probably be foreign to some. Like good debt it relates to the borrowing of money for purchases which will increase in value...but with a kicker. With best debt the commodity being purchased qualifies the borrower to write-off the interest expense on the loan. For specifics you need to talk to your mortgage specialist but it typically relates to the purchasing of equities such as stocks or even mutual funds.

You may have heard ads talking about 'the tax free mortgage', which relates directly to the concept of 'best debt'. As an example, a person who inherits $25,000 could use the money to pay down a mortgage, then turn around and leverage against the equity in the home to invest in the market...with the interest payments on the loan now being tax deductible. To find out more about the“Best Debt” scenario, don’t hesitate to email or call and I can walk you through it.