Mortgages Count as Debt

I started reading about personal finance in earnest when I was around 19.

One of the great debates involves debt and when it is sensible to use it for personal or investment purposes. Some camps maintain that there is both good debt and bad debt while others believe debt in all forms is ultimately something to be avoided. I tend to side with the latter while still accepting that debt has purposes to serve. Good debt typically involves loans used to invest and which provide a net income greater than the carrying cost. Bad debt would include credit card debt used to fuel consumer purchases.

The debate gets further muddied with regard to home mortgages. People seem to suspend reason when it comes to counting their mortgages as debt. I often wind up having in-depth financial discussions with people and the banter often sounds something like the following:

Them: What is your take on debt?

Me: Avoid it as much as possible. Life is simpler without debt. If you do have some, get rid of it.

Them: I just have another year left on my car payment. That’s it. Oh, well, and my mortgage.

This usually causes a moment of anxiety in me as I consider whether this person is open-minded enough to have an honest discussion around debt or whether I should just brush past it casually; Oh, I see, yeah, don’t count that two hundred grand. It’s just a mortgage, after all.

Of COURSE mortgages count as real debt and a burden. Debt is effectively financial cancer. It erodes your financial health steadily unless it is weeded out in its entirety. Aside from professional uses to increase income and/or finance an investment, debt should never be taken on, and even in those cases used as sparingly as possible.

Origins

So where does this notion of mortgage debt being okay come from? The answer is obvious, I would say; just follow the money. Who stands to make the most from consumer indebtedness? The financial establishment itself. Mortgages are big money for banks and mortgage lenders. They represent long-term commitments which mean interest for years to come in addition to huge cross-selling opportunities as consumers tend to consolidate their finances where they hold their mortgage for convenience.

The fact that this form of debt has become so acceptable represents how successful the marketing machine of big industry has been. There is nothing commonsensical about debt as a natural way of life. It goes against a person’s natural tendency to want to live free from the clutches of a creditor.

My brother has written about Modern Day Slavery and how being in debt can be likened to shackles around the ankles of the average consumer. He describes such a person as someone paying the minimums on their credit cards and financing every purchase; from kitchen appliances to their vehicle, everything comes with a monthly payment and just one more loop on the cuffs.

What I have noticed is that, as in the brief dialogue I referenced above, since credit card debt has become so prevalent, it has in some ways made it acceptable to finance large purchases. Namely, people can console themselves that their huge mortgage is okay since “at least” they don’t have credit card debt. In other words, by comparison people justify having one or other form of debt.

To Be Clear

Listen, I know many well-regarded finance writers suggest getting into as much good debt as possible and using other people’s money (OPM) to supercharge your finances, but the reality is that the vast majority of people struggle to manage their own budget. I do not suggest most people take on debt, and certainly not anyone who needs to ask whether it’s a good idea or not. It’s just not prudent.

Still, there are times when taking on debt makes sense. As I mentioned, investors typically make use of leverage to finance real estate deals. By requiring only a relatively small down payment, these investors are able to purchase and rent out many more homes than they otherwise could if they needed to front the entire value of their purchases. Likewise, in the stock market investment world, investors sometimes invest on margin to control additional stock with the use of borrowed funds.

When things are good, the use of debt can be great. The problem is, and always will be, that as much as debt drives the highs, it also exacerbates the lows. The Great Depression and our most recent financial crisis were both fueled by misuse of debt. Real estate speculation led to a bubble in the mid-2000s which eventually burst and threatened to take the entire financial system down with it. In the early 1930s, investors who borrowed on margin to buy stocks eventually received margin calls and the selling that ensued crippled the savings of millions as the market crashed by over 80% from its peak.

The lessons of the past should not be forgotten and debt should be used carefully. Mortgages, car loans, and credit cards all come with a cost.

Conclusion

My simple message to you today is that debt is debt is debt. Whether you’re receiving a favourable interest rate or not, never take more debt than you are fully able to afford. When you owe money, you wear shackles.

In today’s low interest rate environment, my advice is to pay down existing debt and use this opportunity to free yourself. Don’t do what the establishment is suggesting by taking on more loans. Eventually–and nobody knows when–rates will rise again. Don’t get caught with your hand in the cookie jar.

Thank you for reading.

– Ryan

What is your debt management strategy?

Pictures courtesy of pixabay.com