Debt is Debt

December 20, 2018

At the end of the day debt is debt, we hear people talk about good debt and bad debt but no matter what debt is still debt.  A mortgage company is advertising “get out of debt using the equity on your home” – that is not “getting out of debt” that is simply moving debt from one account to another.  The debt is still there!

Mortgage debt is not good debt, in fact for most people mortgage debt is one of the highest risk forms of debt they will ever take on.  Think about it, it’s like Russian roulette – back in the 1980’s mortgage rates were at 28% at the bank.  Those high mortgage rates led to the term “jingle mail” where home owners were dropping the keys to their homes in the mail to send back to the bank.

When you take out a mortgage you take on the largest debt you will ever be exposed to and a great deal of uncertainty.  If interest rates remain low, or relatively low things are good.  But, in Canada at least, you must renew your mortgage very year – to every seven years depending on the term of the mortgage.

Renewing a 25 amortization at a higher rate after five years may push you into extending the term so you can afford to cash flow the payments.  By doing so you may add tens of thousands of dollars of interest charges to the mortgage.  When you take out a mortgage at a favourable rate you hope and pray that when the time for renewal comes around the rates haven’t increased.

Whether it is credit card debt or mortgage debt, debt is debt – the only difference between one form of debt and another is the terms of repayments and the cost of borrowing.  All debt entails repayment and the payment of fees and interest.  Are you further ahead to have high interest and short terms or low interest and long terms?  Often the higher interest and shorter term means lower cost.

How about being debt free?  Is that even possible these days?  The answer is categorically NO!  It is probably not possible for about 80% of the population to live debt free.  Poverty is a factor in driving people to use debt, and ever-increasing taxation and costs of living are other elements.  We have not seen consumer debt levels drop in Canada for decades.

At the end of the day it would be nice to be able to offer a finite solution to debt a way out that will allow the debtor to remain debt free for the rest of their life, but that is not realistic for the clear majority.  We can help you become debt free, we can even advise on steps that ‘may’ help you remain debt free but there are no guarantees, debt is debt!