Can Debt Be a Good Thing?
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By Bromwich+Smith Staff | 1644 words | Reading Time: 8 minutes and 13 seconds | Last Update: 2023/11/01
For many Canadians, debt is something they aim to avoid at all costs, but can debt be a good thing? There are times when debt is looked at as a stepping stone to achieving a bigger goal and is seen as a positive step. For example, student debt can be viewed as a good debt as it increases your education and likeliness of a higher paying job. A mortgage, or car loan are viewed as good debt as long as they are in good standing, as there is a physical item with a value attached to the debt.
Having a mortgage is a vital step toward achieving the dream of homeownership, current studies show that 35% of home owners have a mortgage. This loan is secured against the property or land's value, and individuals pay it back over a set time period. Mortgage terms and interest rates can vary, with numerous providers and lenders to choose from. Only when the loan, including any accrued interest, is fully paid off, do homeowners gain full ownership of their house, and currently that is 23% of Canadians.
Throughout the mortgage's duration, the money you owe to the lender is referred to as mortgage debt. While a mortgage is often viewed as a liability, it is commonly regarded as "good debt" by creditors, as property ownership creates long-term value.
Understanding that debt isn't inherently negative, it's crucial to examine the numbers. Property values tend to appreciate over time, building equity that can be utilized later. Statistics Canada recently reported a significant increase in mortgage debt across Canada, collectively owing $1,989.5 billion. This demonstrates that mortgage debt is not something to be ashamed of but rather something to manage wisely. It's essential to ensure that we meet our mortgage obligations without overextending ourselves. On average, no more than 30% of your annual income should be allocated to your mortgage, encompassing principal, interest, property tax, and condo fees.
When mortgage debt appears overwhelming, there are strategies to manage it effectively:
Create a budget: Developing a clear financial picture is crucial to understand your income and expenses.
Seek lower interest rates: Understanding the full cost of your debt is vital. When renewing an existing mortgage, you have the freedom to explore options beyond your original lender. If you are able to secure a lower rate your original lender may be willing to offer that same rate in order to keep you as a customer.
Know your mortgage terms: Familiarize yourself with interest rates, term length, and the ability to make extra payments or pay a lump sum without penalties. Prepayment privileges can help pay off your mortgage faster.
Understand mortgage penalties: Be aware of the costs associated with breaking your mortgage, as life circumstances can change unexpectedly.
Manage your credit wisely: A good credit rating opens up more mortgage lending options and can lead to lower interest rates. Stay informed about your credit score, avoid late payments, and pay more than the minimum amount.
Consult a Licensed Insolvency Trustee: If you find mortgage debt overwhelming, you don't have to face it alone. There are ways to manage your mortgage debt effectively.
Automotive debt can be viewed as another good debt, if you are paying your loan on time. It shows other creditors that you can manage the debt, and are capable of the repayment terms.
Transportation as a Necessity: For many individuals, owning a vehicle is a necessity. A reliable car can provide access to better job opportunities, transportation for your family, and the ability to meet daily needs.
Appreciating Asset: Unlike most consumer goods, a well-maintained automobile can retain its value and even appreciate over time, depending on the make and model. This means that your vehicle can potentially help you build wealth over the long term, making it a more justifiable expense.
Enhanced Productivity: Owning a car can increase your productivity by saving time and offering convenience. It allows you to reach your destinations efficiently, which is especially crucial if you have a busy schedule or a job that requires regular commuting.
Credit Building Opportunity: Responsible management of an auto loan can be an excellent way to build or improve your credit score. Regular, on-time payments demonstrate your ability to manage debt effectively and can help you qualify for better interest rates on future loans.
How to Manage Auto Debt Effectively
Budgeting: Before committing to an auto loan, create a realistic budget to determine how much you can comfortably afford. Include all related expenses like insurance, maintenance, and fuel. Staying within your budget will help you avoid overextending yourself.
Down Payment: Whenever possible, make a substantial down payment on the vehicle. A larger down payment can reduce the overall amount you need to finance and lower your monthly payments.
Interest Rates: Shop around for the best interest rates and loan terms. A lower interest rate can save you a significant amount of money over the life of the loan.
Loan Duration: Choose a loan term that aligns with your financial goals and budget. While longer loan terms may offer lower monthly payments, they can result in higher overall interest costs. A shorter loan term will help you pay off the debt faster.
Regular Payments: Always make on-time payments. Late or missed payments can damage your credit score and lead to extra fees and penalties. It can also result in your vehicle being repossessed.
Maintain Your Vehicle: Proper maintenance can extend the life of your car and ensure it holds its value. Regular servicing can help you avoid costly repairs down the road.
Refinancing: If interest rates decrease or your financial situation improves, consider refinancing your auto loan to get a better deal.
Student debt is considered good debt under certain circumstances because it can be an investment in one's future that pays off over time.
Higher Earning Potential: Borrowing to fund education, particularly for in-demand fields like medicine, engineering, or technology, can lead to significantly higher earning potential in the long run. The investment in education can result in a higher income and career advancement, which can offset the initial debt.
Low Interest Rates: Student loans often come with lower interest rates compared to other types of debt. This makes them more manageable and affordable over time, especially when considering the potential earnings increase that comes with a degree. This is why, many Canadians will choose to pay off other debt before their student debt in order to cash in on the lower interest rates.
Deferred Repayment Options: Many student loans offer flexible repayment plans, including income-driven repayment, which allows borrowers to tie their monthly payments to their income. This can be especially helpful for those who may face financial challenges after graduation. There may be options to defer payments during times of financial hardships as well.
Building Credit: Responsible management of student debt can positively impact one's credit score, making it easier to access other types of credit, such as mortgages, at favorable terms.
As you can see, debt can be favourable. Debt can help you build your credit, showcase your creditworthiness and build you up for a successful future. If you find yourself struggling with debt, there are options to help navigate financial uncertainty.
Bromwich+Smith offers a range of debt relief strategies to help you regain control of your finances and put your life back on track. Reach out today for a free, confidential, no-obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, Live Chat or you can request a call back at contact us page. We want to see you flourish!
1. Can debt be considered a positive thing in certain situations?
Yes, in certain situations, debt can be considered positive. For example, student debt for education or mortgage debt for homeownership is often viewed as good debt as it can lead to increased earning potential and property ownership.
2. How is mortgage debt different from other forms of debt?
Mortgage debt is secured against a property or land's value, and it's commonly seen as "good debt" because it creates long-term value as property values tend to appreciate over time.
3. What is the recommended percentage of annual income that should be allocated to a mortgage?
It's recommended that no more than 30% of your annual income should be allocated to your mortgage, including principal, interest, property tax, and condo fees.
4. How can one effectively manage mortgage debt?
Effective management of mortgage debt involves creating a budget, seeking lower interest rates, understanding mortgage terms, being aware of mortgage penalties, managing credit wisely, and considering consultation with a Licensed Insolvency Trustee if debt becomes overwhelming.
5. Is automotive debt always considered good debt?
Automotive debt can be considered good debt if you make timely payments, as it demonstrates your ability to manage debt effectively. However, it depends on your repayment behavior.
6. What factors should be considered when managing automotive debt?
When managing automotive debt, consider budgeting, making a substantial down payment, securing the best interest rates and loan terms, choosing a suitable loan duration, making on-time payments, maintaining your vehicle, and potentially refinancing for a better deal.
7. Under what circumstances is student debt considered good debt?
Student debt is considered good debt when it is an investment in education for in-demand fields, leading to higher earning potential. It also benefits from lower interest rates and flexible repayment options.
8. How can responsible management of student debt positively impact one's financial future?
Responsible management of student debt can positively impact one's financial future by building credit, showcasing creditworthiness, and making it easier to access other types of credit, such as mortgages, at favorable terms.
9. Can debt help build credit and pave the way for a successful future?
Yes, debt, when managed responsibly, can help build credit, demonstrate creditworthiness, and set the foundation for a successful financial future.