Is mortgage debt always bad debt, and which is better mortgage debt or credit card debt?

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Good Debt vs. Bad Debt


Bob Alexander - Canadian Mortgage Broker
Nov 13, 2012 - 1:29:37 PM
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These days it is impossible to read a newspaper without some reference to the fact that Canadian families have an overall debt to income ratio of 151%. (In 1990 it was 90%). Keeping in mind that headlines like this sell newspapers, should we be concerned?

 I do feel that we should be concerned but not in a way that the media would lead you to believe.

Before we panic, it is important to understand that the ratio treats all debt equally. What this means is that it doesn’t matter whether you are paying 30% interest on a credit card or 3% on a mortgage. (Good debt versus bad debt). The ratio also doesn’t disclose the actual amount of the debt and the income being used.

 Here is an example to show how misleading the ratio can be.

Carolyn owns a home worth $500,000.00 with a mortgage of $150,000.00 and no other debts. She earns $100,000.00 a year.

Bob has no assets and an income of $30,000.00 per year. He has debts totaling $45,000.00.

Both individuals have a debt to income ratio of 150% however Carolyn is in far better financial shape. Bob, however, is on the verge of bankruptcy.

It is important to also understand that the ratio is made up of two debts, mortgage and non-mortgage. It is the mortgage debt that gets all the press and the Canadian government has recently changed mortgage lending rules to help keep mortgage debt in line as a result. Mortgage debt as a percentage of income is higher today than in the 90’s (as a result of higher house prices today) but interest rates are significantly lower. So is mortgage debt really the problem?

In my mind, car loans and credit cards are the real issue. It is far too easy to get a car loan and sign up for multiple credit cards. I can’t tell you how many clients I have had to decline over the years as a result of having a car loan. In some cases, the monthly car loan payment exceeded what the mortgage payment would have been!

Credit cards are another story. Many clients get multiple cards even for stores that they barely shop at. Client uses the card once or twice and then forgets about them. Several years later, as a result of checking their credit history, they find that they missed an annual fee of $25.00 and wrecked their credit. I also love the fact that the card companies now put on the monthly statement something to the effect that at the minimum payment it will take you 22 years to pay off the debt! Thank you for the warning but this will not stop the problem.

I feel that it should be harder to get car loans and that credit card companies should be forced to do more diligence prior to approving a credit card or increasing the credit limit.


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