Good Debt vs Bad Debt

04 February 2015

Today I want to talk about Good Debt versus Bad Debt.

What does that have to do with Real Estate? Well, all the experts are predicting a fall in real estate prices based on the per capita ratio of total consumer debt to personal disposable income. But, they failed to look at good debt versus bad debt.

Bad debt occurs when you buy things that depreciate or has a very short shelf life, such as cars holidays and clothes. Good debt occurs when you buy an asset that appreciates over time, if it also returns an income, which is even better. An example would be Real Estate. So let’s prove my point. Take two people making $100,000 a year. One rents and has credit card debts of $30,000 and a car loan for $40,000. That’s a ratio of less than 100%. The bank of Canada loves those people. The second person owns a condo with a $350,000 mortgage on a $400,000 condo. His ratio is 350% which is more than double the Canadian average, which is bad, according to the Bank of Canada, but who would you rather be? That’s my point about using simple statistics to prove a point. So don’t be afraid of good debt and stay away from the bad debt.