Growing up, debt was always framed as a burden, a constant source of stress. Being completely debt-free was the ultimate finish line. And don't get me wrong, being debt-free is a fantastic goal. But as I've grown in my career and personal finances, I've realized it doesn't always have to be your number one goal.
How My Own View on Debt Shifted
In my 20s, I focused hard on paying down my mortgage as fast as humanly possible. Outside of my mortgage, I refused to touch debt. I scrimped and saved to make sure I had cash on hand for post-secondary, my vehicles, and anything fun like traveling. The idea of taking on extra debt wasn't even on my radar, and honestly, even my mortgage felt like a heavy cloud hanging over my head.
The older and more experienced I've gotten, the more comfortable I've become with debt, specifically, good debt.
I strongly believe that good debt is a great tool in getting you ahead in life. I have a simple rule of thumb: if I can write off the interest cost, it's likely good debt.
Bad Debt vs. Good Debt
Let's call a spade a spade, there is definitely debt that just costs you money.
· Bad Debt: Credit cards, lines of credit used for daily expenses, and high-interest consumer debt. This kind of debt has one job: moving money out of your pocket and straight into someone else's. In my opinion, this should be avoided (or eliminated) as fast as possible.
· Good Debt: This is borrowed money that has the potential to generate a greater return than what the debt costs you. Think of a business loan that generates new revenue, or using a strategy like the Smith Manoeuvre to leverage home equity to grow a real estate or investment portfolio.
The Missing Piece: Converting Bad Debt into Good Debt
Where it gets really interesting is a concept very few Canadians are ever taught: debt can be converted.
Specifically, non-deductible debt, like a standard Canadian primary residence mortgage, can be strategically restructured into tax-deductible debt used to invest.
In Canada, you cannot deduct the interest on your primary mortgage. But interest on money borrowed to invest in income-producing assets, like non-registered invsestments or real estate, generally is tax-deductible.
When you restructure your debt properly, you can leverage the equity you're already building to fund an investment portfolio. In practice, that means:
1. Real Tax Savings: The interest on your investment borrowing offsets your taxable income.
2. Parallel Growth: You're building wealth in investments while still paying down your home.
3. No Extra Out-of-Pocket Cash: The strategy runs using the cash flow you were already spending on your housing costs. No drastic lifestyle changes required.
Why Didn't Anyone Teach Us This?
If this is so effective, why isn't everyone doing it?
Honestly, the traditional banking system isn't particularly motivated to explain it to you, and a lot of financial professionals simply don't take the time to educate people on how it works. It takes extra work to map out.
Unless you work with someone, or a team, that looks at your whole financial picture, your mortgage, your tax situation, your insurance, and your investments together, these options rarely get brought to the table.
The Bottom Line
Debt isn't inherently evil. It completely depends on what that debt is doing for you.
If it's financing things that lose value, wipe it out. But if it's structured strategically to build equity, cut your tax bill, and secure your financial future, it becomes one of the most powerful tools in your toolkit.
Whether you're buying your first home, refinancing, or curious about how to unlock your existing home equity to build real wealth, let's connect. We can build a custom plan that fits your exact goals, no cookie-cutter advice.