Good debt, bad debt, or no debt?

For most of us, there’s a love/hate/guilty pleasure thing going on here concerning our relationship with debt. The messages we’ve heard about debt are not consistent either — is it good, bad, or otherwise? Furthermore, should mortgage debt be lumped into the same category as all other types of debt?

See my other related articles recently published in the NZ Herald.

We know debt is bad because everyone says so, but we need it to do the things we all do. How do our friends have what they have, and do what they do, especially when they make what they make? Well, most likely, it’s debt. If they’re fortunate enough to own their own home, it’s cheap debt too.

Should I repay my mortgage faster, or invest?

Traditional financial advice would encourage you to repay debt first, before building wealth. Traditionally you see, debt has been expensive, so this makes sense. Getting rid of debt frees up your cashflow to invest in other things faster and improves your overall risk profile — nothing wrong with that, right? But what about today, with the “new norm” of lower interest rates? If the borrowing environment has changed, should our attitude towards borrowing also change?

If you own a home and have a mortgage, the tax-paid returns on investment that you get elsewhere, especially for lower-risk options, are usually not as much as you would get compared to the repayment of your mortgage.

If you were a low-risk investor, getting rid of that mortgage first does make good sense, but what about the younger investor keen to start developing wealth faster?

What if, because of the low interest rate environment we’re in, property and share values continue to rise? Well, the opportunity cost of you not investing elsewhere is higher — you’re better to keep your debt in place and invest in higher-risk asset classes that earn a higher return (so long as you’re comfortable with the higher risks involved in doing so).

Like a strict diet prescribed for mothers-to-be, though, often financial advice is “dumbed down” to cater to those who may get into trouble if acting alone with no guidance from professionals.

For wealth developers, though, getting rid of your mortgage too fast and too soon can neuter your wealth-building journey.

Debt repayment should be prioritised when it’s debt taken out for dumb stuff — don’t go and book Disneyland on a credit card with no intention of paying that off quickly, for example. There is such a thing as bad debt and you should avoid it.

But debt used to acquire assets that are growing in value at a rate greater than your debt-servicing costs can make sense in today’s new world. Now this, of course, relies on the value of that asset (let’s say it’s a property, for example) going up in value consistently over your investment horizon.


There’s a risk that your investments won’t always perform but there’s also a huge opportunity cost here to consider. Many Kiwis have missed out on the greatest boom time in the property and sharemarket that we’ve ever seen, in favour of aggressive debt repayment.

The logical and effective path to building wealth is often scorned by those who have “done it harder”. So how much debt is too much? Not an easy question to answer, as it varies depending on who is asking. If you’re fairly confident in your source of income and your eventual plan to repay the debt at some stage, consider getting into as much debt as you can.

Really? Yes! Banks these days have to make a call as to what is “too much” debt, so there is a built-in safety measure in place already for you. If you model expected capital gains, taking on larger debt makes sense, but remember, it’s relying on the assumption that property only increases in value over time.

None of this should be considered a high-debt/high-lifestyle endorsement, but many people have attempted to reduce their mortgage debt in an overly zealous fashion at great opportunity cost. Why? Because they’ve been told it’s the right thing to do.

In reality, those people who borrowed up to their eyeballs in mortgage debt over the past decade have done incredibly well in the property market. Were they taking a high level of risk? Perhaps — but they were able to take that risk based on their age and their financial stage.

Time will tell if this is unwise advice (and this shouldn’t even be considered advice) to follow. If interest rates stay low and stay low for longer, we could learn that even if we don’t believe “soaking in debt” is a good thing to do, the market could teach us otherwise. If your reality doesn’t match your paradigm, perhaps the paradigm needs to change?