Good debt vs. bad debt

Until recently there was no such thing as ‘good debt’ or ‘bad debt’ as all debt was ‘bad debt.’ Owing money for any reason wasn’t a good thing and it was important to focus on paying off everything. 

But now we are hearing about having ‘good debt’ and having ‘bad debt.’ So what’s the difference?

‘Good debt’ is considered to be funds that you borrow to purchase an appreciating asset. Something that may grow in value such as real estate, a business or investments.

‘Bad debt’ would be money you borrow to purchase a depreciating asset – cars, boats, clothes, consumables – or something that you can’t afford. Something that quickly loses value or doesn’t generate any revenue. It is most likely at a higher interest rate and even if the rate is low today you should also factor in a higher rate and potential fees to ensure that you can afford it in the future. 

High interest rate credit card debt is considered ‘bad debt.’ Credit cards themselves are not evil if they are used prudently and balances are not carried over.

Mortgages are considered ‘good debt’ because real estate generally appreciates over a period of time although there are no guarantees. You are also borrowing at lower interest rates.

Home equity lines of credit, which are a type of mortgage, can be either ‘good debt’ or ‘bad debt’ depending upon what they are used for. If you are using your line of credit to purchase depreciating assets or using it for your day-to-day expenses, it would be considered ‘bad debt.’ Consolidating your high interest credit card debt into a home equity line of credit would be ‘good,’ as there would be a significant lowering of the interest rate.  

Car loans would be ‘bad debt’ as you are purchasing a depreciating asset, but unfortunately the reality is that this is the only way that most people can afford a vehicle. The best thing to do is pay cash or as much cash up front for a car as possible. Does everyone really need a fancy new car?

Pay day loans or cash advance loans are definitely ‘bad’ as the interest rates and fees are astronomical.

In reality, it can be argued that no debt is ‘good debt’ – but used in moderation and with an educated approach, debt can assist in many things, including investing for retirement planning.

Using credit cards for everyday expenses and not paying them off right away is a dangerous path. Recently TD Canada Trust announced changes to how interest on their branded credit cards will be calculated. With the change, the bank will start to add any unpaid interest charges to the cardholder’s balance at the end of each statement period. Currently TD calculates interest based on a cardholder’s average daily balance until that amount has been paid in full. As a result you will now be paying interest on unpaid interest.

Prudent borrowers maximize ‘good debt’ and minimize ‘bad debt.’ It is possible to overuse good debt so be careful. 

If you are experiencing any financial challenges and currently own your home please reach out, as there may be solutions to relieve financial stress.

Mortgage check-up time

Hey, I get it. Mortgages are boring! Why would you want to revisit your mortgage every year?

Your mortgage is likely the largest investment you will ever make; yet, most Canadians don’t even think about it after first signing off until renewal time is approaching or they are considering a re-finance to access equity.

About 80% of Canadians visit their doctor at least once a year to help ensure they remain physically fit, but far less are checking their financial fitness annually. 

It’s time for a mortgage checkup. Thankfully, this checkup doesn’t require you to face your weight on that maddeningly accurate doctor’s scale, or sit in a cold and drafty little room with an open hospital gown. Actually, it’s a mortgage checkup that’s in order, and making time for a quick review may yield some amazing results.

Life changes, families grow, jobs move, retirement objectives shift. There are any number of reasons why your mortgage, and possibly your entire financial picture, should be evaluated from year to year. Maybe there are no changes needed, but if there are, it’s better to identify them early.

The mortgage that you signed up for a few years ago may no longer be the best fit for you. Doing a financial checkup is a very smart thing to do annually. Many often just wait for the renewal letter before they look at their mortgage and then go back to their current lender without considering whether that mortgage meets their current needs.

There are so many things that a mortgage can do for you. It can help you become more tax efficient, build wealth for retirement, renovate your home, consolidate high-interest credit card debt or perhaps invest in a business, purchase a vacation or rental property, and so much more.

When you obtain a mortgage, it is most likely the largest financial transaction of your life. Here’s a thought for you: instead of focusing solely on the interest rate, perhaps it might be important to consider various strategies that you can utilize within your mortgage that will assist you with your goal of ‘mortgage freedom’ and ‘financial freedom’ when you are ready to retire.

Having the same mortgage strategy your entire life is not always the best financial decision. If you are applying different mortgage strategies at different stages of your life, just like your other investments, it can lead to the financial wealth and the independence you are hoping for in retirement.

Don’t wait for your mortgage to come up for renewal and don’t wait until after you have made a major change in your personal situation. By reviewing annually you will ensure you stay financially fit.

Give me a call today for a review. I promise it won’t hurt!

Mortgage pre-approval tips

Is a mortgage pre-approval important? The short answer is ‘yes’! It is definitely important so you have the confidence to move forward with your house hunting. A pre-approval is for you and not the lender. We are going to review your income documents and confirm the source of your down payment funds. You will know if there are any areas of concern and we will discuss a plan to move forward.

The term ‘pre-approval’ is somewhat misleading, as we cannot guarantee that you are 100% approved for your financing. There are many variables that will factor into your final mortgage approval, including the lender reviewing the property you are purchasing.

A mortgage pre-approval can give you the confidence to know that you fit within the guidelines of a mortgage lender, and also a mortgage insurer if you require an insured mortgage for your purchase. It will also establish a realistic budget for your new purchase.

Here are the benefits of getting pre-approved:

You will know your price range before you start house hunting.

Your realtor will know exactly what type of property you should be looking at, so that can save you both time and also narrow down your home search.

Being pre-approved can give you an edge over other buyers as you may be able to close quicker and that might be important to the seller.

There aren’t going to be any surprises as you will already know how much you require for a down payment, closing costs and how much your monthly mortgage payments are going to be.

Since you are already pre-approved this may put you in a better position to negotiate with the seller.

A pre-approval also gives you the benefit of securing your interest rate for up to four months. This is a great benefit, especially if interest rates are predicted to increase.

Here’s another tip – you don’t have to wait for an appointment to obtain a mortgage preapproval. The first request I often receive is for a meeting, and I am always happy to accommodate my clients, but an in-person meeting is not required for a mortgage pre-approval. Most are happy to find out that we can complete the process via an online portal, telephone and email, including collecting the required documents. This is generally more convenient for my clients and a great time-saver, which can result in the pre-approval being completed in one day, most times. It’s a simpler process than most think. I can complete your pre-approval most likely before you even get to an appointment with your bank.

Once you have a pre-approval in hand you can then start your home hunting with confidence. 

The last round of new mortgage qualification rules are making it more difficult for ALL to obtain financing, so it’s better to go through the simple process of a mortgage preapproval before moving forward with placing an offer on a new home. It will save you time and stress.

Before you fall in love with a home you should know if it’s within the reach of your finances. The first person you should call before reaching out to your realtor is a professional mortgage broker.

To consolidate, or not?

If you are carrying high-interest credit card debt, car loans or other personal loans you know that it can be challenging to pay off everything that you owe. You may have those post-holiday debts hanging over your head.

If you are a homeowner and there is sufficient equity in your property, consolidating all of your debt and including it in your mortgage payment might be the right solution for you. 

There are many benefits to debt consolidation including the following:

  • A much lower monthly interest rate for all of your debts
  • Lower monthly payments
  • The comfort and convenience of making only one monthly payment instead of making multiple payments on your credit cards and other loans
  • Improving your credit score by reducing the amount you owe and now being able to make all of your payments on time

A debt consolidation mortgage is not a quick fix, and a full financial review should be completed with your mortgage broker. There could be costs to break your current mortgage to include those higher interest debts with your mortgage payment. You may be lowering your current monthly payments but now the debt is going to be repaid over a longer period of time. Is that really going to be financially beneficial? It all comes down to the math as the overall cost of borrowing could be higher or lower than what you are currently paying. Crunching all the numbers is the only way to know for sure.

There is also another real danger to consider – are you disciplined enough to stick to a budget going forward and live within your current income or will you be tempted to use those credit cards again and end up in exactly the same situation in the near future? It can become a vicious circle unless you learn to live within your budget. You don’t want to end up in the same place a year from now.

On the other hand, if you are disciplined and can live within a budget the benefits of the increased monthly cash flow could significantly improve your financial situation. These extra funds might be used for investing in your retirement with RRSP contributions and having an emergency financial fund in place for life’s surprises.

There are several possible options to consider for a debt consolidation mortgage, including breaking your current mortgage to include the debt owed, a second mortgage for the consolidation, or a home equity line of credit. A small unsecured personal loan may be sufficient. In an extreme situation it may be necessary to sell your home to clear off all debts.

You may have heard about ‘interest free’ debt consolidation programs where a company will negotiate on your behalf to reduce the debt and arrange a single monthly payment. With very careful consideration this may be a last resort option but be aware that this type of solution will ruin your credit rating for a long time. Get all of the facts before entering into this type of arrangement. 

Now all that’s left is to figure out precisely which solution is best for you to wipe out all those high interest payments. If you would like a complete confidential assessment and discussion of all the possible options, please give me a call at 1-888-561-2679 or email [email protected].

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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