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Canadians are continuing to accumulate household debt at a record pace. Economists are warning that an interest rate shock could place many Canadians in financial peril. It may be a good time to review your household debt situation and consider making changes to protect yourself and your family from interest rate stress.
Good Debt vs. Bad Debt
Financial experts often categorize debt as being “Good Debt” when it is used to purchase (or is secured against) an asset that is expected to increase in value, or produce a future income stream. This may be a small business, an investment portfolio, an investment in a commercial or residential revenue property, or for most Canadians, the investment they make in their own home. This concept is called financial leverage. ‘Bad Debt” is debt that is incurred for just about everything else … New cars, Household Appliances, Vacations, or simply the dreaded Credit Card debt. An exception to this rule is “Student Loan Debt” which generally is incurred to enhance the earning power of an individual and thus produce an increased revenue stream in the future.
Making Bad Debt into Good Debt
The process of Debt consolidation is one way to convert your Bad Debt into Good Debt. This is done by taking your high interest “bad debt” and leveraging it against one of your assets which is expected to continue to appreciate, at a lower interest rate. Then with your monthly payments and overall interest costs reduced, you use the savings to invest in other “appreciating Assets” or to pay down your “Good Debt” faster, because the ‘Very Best Debt”, is no debt at all.
Check out this example, derived from a client that we helped recently, as an illustration of how this works:
Client – BEFORE Debt Consolidation with Alberta Mortgages:
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Balance |
Interest Rate |
Monthly Payments |
| Principal Residence – Value |
$300,000 |
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| Outstanding Mortgage |
$200,000 |
5.75% |
$1,250.00 |
| Credit Cards |
$ 25,000 |
18.00% |
750.00 |
| Auto Loan |
$ 2,0000 |
12.90% |
450.00 |
| Total |
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$2,450.00 |
Client – AFTER Debt Consolidation with Alberta Mortgages:
| |
Balance |
Interest Rate |
Monthly Payments |
| Principal Residence – Value |
$300,000 |
|
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| New Mortgage |
$255,000 |
3.84% |
$1,320.00 |
| Total |
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$1,130.00 |
Check out what that monthly savings could become if invested on a monthly basis in our
Investment Savings Refinance Calculator
Try your own savings scenario by using our Interest Savings Refinance Calculator
Call us to discuss, we would be happy to review your situation and work out a plan that will get you debt free sooner.
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