Good debt and Bad debt…. do we Canadians recognize the difference?

I saw this article from earlier this year about Good debt and Bad debt.  Canadian Personal debt levels have now surpassed $2.21 trillion.  That’s a big number, should we be concerned?  I started to wonder how much of this is Bad debt?  Let’s take a closer look at these stats.

First, let’s define Good debt. I agree with the article, to me, it’s debt that is used to accumulate an investment or asset and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible.  Investments like a rental property, stocks, bonds, etc would qualify. Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property-related costs from the rental income.

Bad debt is an expense where the interest is not tax-deductible and is used to purchase consumer goods. Things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa, etc.  Hey, we all spend some money on these items, the key is to have some discipline. Borrowing to buy a TV, a computer, take a vacation, etc is generally a bad idea. Save up for these purchases and then pay in cash.

Now the stats say that $2.21 trillion makes up all personal debt including mortgages.  Hey, wait a minute, outstanding mortgage balances recently topped $1.44 trillion in Canada.  If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $2.21 trillion.

According to Statistics Canada, We now have $769.4 billion in potentially bad debt.  So let’s estimate the household average debt to $58,000 per family of 4.   Is that really a high number?  And let’s look at our asset base. Guess what?  Our personal asset base is appreciating in value. 

Here’s a previous article from back in 2011 that shows Canadians borrowing wisely and taking advantage of record-low interest rates to enhance our net worth.  And here’s a more recent article from CBC.ca showing consumers have continued to moderate their borrowing, with debt increasing at the slowest pace in eight years. 

Remember, Good debt can help you grow your net worth. Bad debt is for personal lifestyle and usually decreases your net worth. We all have some bad debt, we just need to minimize it as best we can.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@canadamortgagenews.ca