Canadians naive about how long they’ll be in debt

[The Yen Man]

If everything is considered debt, then I'll probably be in debt until I retire. Even when I fully pay off my home in the future, I'm going to be borrowing money to fund other investments. So I'll always be carrying debt. But the key is to have net positive in equity. There's nothing wrong with "renting" money to make more money.

[Kybosh]

I find people continually get bigger and bigger mortgages for some good reasons (growing family, need a bit more space) and some bad ones (keeping up with the Jones). Ergo, people continually need 15-20 years to get out of debt or pay off a mortgage. This is probably true until you're an empty nester and you choose to downsize.

Another aspect is that people change houses really frequently these days. Honestly, I find it's quite rare with my peers to stay in a house they own for more than 5 years. Add up frequent realtor fees, lawyer fees, renovation up-keep before selling etc. and your equity shrinks.

[squiggs96]

This is why our country is getting into financial problems. They think a mortgage is not a debt. Just because you house is worth more today than you owe, doesn't mean you don't owe the bank the debt. If your car is worth more than you owe, and you still owe on it, than you have some debt. You are in a net equity position, but still have debts. If you house or car is set on fire, you still owe somebody the balance owing.

[corporatejay]

Originally Posted by squiggs96

This is why our country is getting into financial problems. They think a mortgage is not a debt. Just because you house is worth more today than you owe, doesn't mean you don't owe the bank the debt. If your car is worth more than you owe, and you still owe on it, than you have some debt. You are in a net equity position, but still have debts. If you house or car is set on fire, you still owe somebody the balance owing.

The point people are trying to make is that everyone here is looking at having a mortgage a "40 years 0% down". Which is just patently false.

Mortgages are some of the cheapest ways to borrow money since they are a secured against an asset. Aggressively paying down a mortgage that you are paying 4% interest on vs. investing in the stock market where returns can be, in most cases, much greater than 4% is much smarter.

Being "in debt" is such a general and misleading term that it's ridiculous to get worked up about it, you need to dig much deeper to find out what someone's NAV is.

[yads]

Originally Posted by Slava

Just out of curiosity then do you think that people should just save up until they can buy a home in cash? I get what you're saying about the solvency point, but at the same time borrowing is the one way that most people can afford to own a home. You can't usually borrow money for free (especially hundreds of thousands of dollars), so your options are limited.

Clearly that's not realistic for most people. However, most people justify buying a home by saying that you're just throwing money away by renting. What people fail to realize is that in one scenario you're renting a home, in the second scenario you're renting money. (I own a home fwiw.)

[rd_aaron]

The only way a mortgage is "good debt" is if it produces income (ie the rent is more than the monthly cost of owning and maintaining the place). Even then, you have to consider that the place will be vacant from time to time.

There's nothing wrong with putting yourself in debt to buy a home. The problem lies in the fact that people are overextending what they can afford by having a 5% down payment and 35 year amortization. If interest rates rise, or the housing market has a correction, a lot of people are under water.

[chemgear]

I wonder if the growing amount of household debt is kinda like the whole BMI/fat argument.

Yes, the BMI is not the end all and be all of weight/health measurements. But the fact that so many people overall are getting so fat seems to be a major problem in the grand scheme of things.

But instead of seeing that or doing something about it, it seems like people try to key in on the fact that BMI may not work for the odd fellow that is "big boned" (healthy but higher in that metric.) That somehow seems to make people feel better, dismiss the overall concern, and just go on and get even fatter.

Just rambling out loud - then again, perhaps I am missing the forest through the trees.

[Sidney Crosby's Hat]

The one argument for mortgages is, are you better off having zero debt and paying, say, $1800 per month for rent or having a mortgage that costs you $1500 per month total (with no other debts).

[Sidney Crosby's Hat]

Originally Posted by chemgear

I wonder if the growing amount of household debt is kinda like the whole BMI/fat argument.

Yes, the BMI is not the end all and be all of weight/health measurements. But the fact that so many people overall are getting so fat seems to be a major problem in the grand scheme of things.

But instead of seeing that or doing something about it, it seems like people try to key in on the fact that BMI may not work for the odd fellow that is "big boned" (healthy but higher in that metric.) That somehow seems to make people feel better, dismiss the overall concern, and just go on and get even fatter.

Just rambling out loud - then again, perhaps I am missing the forest through the trees.

Here's my problem with BMI - how is 6'2" 200 lbs overweight?

That's off-topic a bit but a legitimate question.

[Flacker]

Originally Posted by Phanuthier

Never mind, I thought you meant some sort of massive inflation of real estate. If real estate inflates significantly higher than the inflation of currency, you're gonna want to get out, ASAP.

There are some serious flaws in this logic.

Where do you live when you sell? A cardboard box? If real estate has appreciated then all properties have likely increased in value during this time. How do you take your gains? Move to Phoenix?

If real property prices are skyrocketting you can be sure that rents will move with the inflation as well. Short of leaving dodge there is no way to realize your gain.

A rent or income property is a totally different situation that I would definately consider a pure asset.

[yads]

Originally Posted by Sidney Crosby's Hat

The one argument for mortgages is, are you better off having zero debt and paying, say, $1800 per month for rent or having a mortgage that costs you $1500 per month total (with no other debts).

Depends is $1500 just the mortgage cost? How much are taxes? How much is maintenance? Is the $1500 with current interest rates or long term average rates?

[squiggs96]

Originally Posted by corporatejay

The point people are trying to make is that everyone here is looking at having a mortgage a "40 years 0% down". Which is just patently false.

Mortgages are some of the cheapest ways to borrow money since they are a secured against an asset. Aggressively paying down a mortgage that you are paying 4% interest on vs. investing in the stock market where returns can be, in most cases, much greater than 4% is much smarter.

Being "in debt" is such a general and misleading term that it's ridiculous to get worked up about it, you need to dig much deeper to find out what someone's NAV is.

I agree with pretty much everything here. My point I was trying to make is whether it is good debt or debt debt, it is still debt.

I have a LOC on my house and mortgages on two rental properties. I have net equity in all three, but I still have debt on all three. I'm okay being in debt as I can service it all without extending myself. I likely won't be debt free for 20 years, as I will continue to buy rental properties and financing 80% of each one. I'll sell them eventually, but to be truely debt free won't happen anytime soon.

[corporatejay]

Originally Posted by squiggs96

I agree with pretty much everything here. My point I was trying to make is whether it is good debt or debt debt, it is still debt.

I have a LOC on my house and mortgages on two rental properties. I have net equity in all three, but I still have debt on all three. I'm okay being in debt as I can service it all without extending myself. I likely won't be debt free for 20 years, as I will continue to buy rental properties and financing 80% of each one. I'll sell them eventually, but to be truely debt free won't happen anytime soon.

I suppose my point was that this type of borrowing isn't the "reason our economy is in such trouble" and debt isn't the boogeyman that people are making out to be.

To say that most canadians are naive about how long they'll be in debt is probably in large part because most young canadians think paying off debt is the most important thing, until they meet with a financial planner and they explain to you that there are better things to do with your money, and therefore they won't aggressively pay down some of their "good" debt.

[blankall]

Originally Posted by Superfraggle

In the way that you still owe $500,000. Just because you could pay off the debt if you sold the house doesn't mean the debt doesn't exist. The house is only worth $1 million when someone buys it from you. Until then, it doesn't help with the debt.

You could make that analogy with any asset. The stocks you have could become worthless too. The money in the bank account could undergo inflation and be worthless.

The simple fact of that matter is as long as you are above water on the mortgage your assets are worth more than your debts and, on the whole, you are not in debt.

[squiggs96]

Originally Posted by blankall

You could make that analogy with any asset. The stocks you have could become worthless too. The money in the bank account could undergo inflation and be worthless.

The simple fact of that matter is as long as you are above water on the mortgage your assets are worth more than your debts and, on the whole, you are not in debt.

You are still in debt. You still have debt. You owe a debt to the bank. That is going nowhere unless you pay it off. Whether you are in a net equity or net deficit position, you will still have debt if you owe money.

[blankall]

Originally Posted by yads

People who are saying mortgage is not debt in this thread is so mind boggling. If your liabilities exceed your assets it's time to declare bankruptcy. Just because you're solvent, does not mean you don't have debt. Valuations of any non cash asset can change from day to day.

I heard a great analogy of what someone is doing when they get a mortgage. You are simply renting money.

valuations of cash assets change day to day too...what's your point.

I have a mortgage where the value of the house exceeds the amount I owe to the bank. I don't consider that a debt. In fact, if I wanted, I could further leverage the equity I own in the house. It's more like I own part of the house than I am in debt. Without the mortgage, I would own none of the house.

[blankall]

Originally Posted by squiggs96

You still have debt. That is going nowhere unless you pay it off. Whether you are in a net equity or net deficit position, you will still have debt if you owe money.

Disagree.

I rent my place out. It's a business. A business where the assets exceed the debts and I build equity through it.

[Kerplunk]

I have read in a few places that houses are best seen not as assets, but as liabilities. The reason being that, until you actually sell it (or rent it), it doesn't really make you money. If you think of it as an asset, you could see yourself as having a positive net worth, but still have an overall negative cash flow, which is what will really affect your day-to-day life, and how you can save for the future.

[corporatejay]

Originally Posted by Kerplunk

I have read in a few places that houses are best seen not as assets, but as liabilities. The reason being that, until you actually sell it (or rent it), it doesn't really make you money. If you think of it as an asset, you could see yourself as having a positive net worth, but still have an overall negative cash flow, which is what will really affect your day-to-day life, and how you can save for the future.

A house is an asset. The mortgage is a liability.

[Phanuthier]

Originally Posted by blankall

Disagree.

I rent my place out. It's a business. A business where the assets exceed the debts and I build equity through it.

Just because you are generating revenue, it doesn't mean that a mortgage exceeds the debt. Are you confusing debt payments (which are not coming out of your pocket) with debt? Whether you rent out a property or not, if you took out a mortgage, thats a debt. Bottom line.

Originally Posted by Kerplunk

I have read in a few places that houses are best seen not as assets, but as liabilities. The reason being that, until you actually sell it (or rent it), it doesn't really make you money. If you think of it as an asset, you could see yourself as having a positive net worth, but still have an overall negative cash flow, which is what will really affect your day-to-day life, and how you can save for the future.

Its a fixed asset. I think you maybe mean a investment? The idea you're probably thinking about is, you are always living in a house, so if your house is an investment and you liquidate it, then you don't have a place to life.