Do you consider your mortgage "debt"

[yads]

Originally Posted by Realtor 1

Comparing a student loan with a mortgage could not be any worse of a example in terms of debt.

You're right a student loan is probably one of the best uses of debt and a mortgage is right in the middle.

[photon]

Originally Posted by corporatejay

I obviously can't speak for everyone in that thread, but in the context of that thread where people talked about being "debt free", I landed on the side of "well, depending on the context. I wouldn't consider someone who has a $200,000 mortgage on a $1,000,000 house to be 'in debt'" because their overall net worth is so positive. It was more a backlash against the idea that being "debt free" is the be all the end all.

Ah ok I see.

Yeah if you have debt but it's secured against an asset that is worth more than the debt, then the net worth is positive and that's what I think is more important to look at than just the amount of the debt.

If there was an investment that paid 10% guaranteed, who cares about being debt free, I'm going to incur as much debt as people will give me to invest (as long as the cost of borrowing is less than 10%).

I don't really consider one's own home an asset though (and definitely not an investment) since you can't just sell it and use the money; you need somewhere to live.

[photon]

Originally Posted by Rathji

So just on those calculations alone, it is pretty much impossible for a house to be worth more in inflation adjusted dollars once the mortgage is paid off. However, you did live in it (or rented it out) for those 25 years, so that is where the benefit comes in.

Well that and the other benefit is having access to $300,000 when the house costs $300,000; the cost of borrowing.

[Buff]

I do, and yet I don't consider my mortgage to be debt. I consider it to be one of those things that I'm going to have for several years. Kind of like a cost of living. I've still got 21 years left on the current plan to pay it off so it is going to be with me for a long time.

From time to time I carry a balance on my credit cards. Whenever I pay them off I consider myself debt free, even though I have a mortgage. Perhaps I just think that way to make myself feel better but I know there are others who have similar reasoning.

[Kybosh]

Any $$$ that hangs ominously over my head is a debt in my books. I have a relatively small mortgage (by Calgary standards), but I'm still super nervous about it to be honest. It beats renting hands down, however.

[OldDutch]

Originally Posted by Rathji

It is debt, but it is debt that is secured to an asset that in the long run will probably not depreciate.

In that way, unless you are under water on your mortgage, the fact that you have it is likely increasing your net worth - because it allows you to own your home, which you have equity in.

So it is debt, but it is likely that it is much better debt than a credit card or normal line of credit.

I agree with this. However, many people just assume their house will make them money in any instance. This is false. You could have debt in a house, and lose money when you sell. Therefore, in this situation, your house debt is no better than car debt.

There is a great article in the Real Estate thread that talks about how many people have lost money buying after 2007 and selling today. Can't remember the number but it leans heavily to people losing money.

The key is that you can always stay in your house forever. That gives it an edge over a car, or other forms of large debt. However, if your pre-text was to sell because you can't afford to stay there forever (ie: classic property flip), then you should not be taking on this type of debt. It is not good debt at all.

I guess what I am trying to say is that real estate is not a gimmie. You can still very much get burned, even in Calgary.

[Sliver]

I'm embarrassed for CP this question was even asked.

[MarchHare]

So just on those calculations alone, it is pretty much impossible for a house to be worth more in inflation adjusted dollars once the mortgage is paid off. However, you did live in it (or rented it out) for those 25 years, so that is where the benefit comes in.

Out of curiosity, if you had spent $300k on a home in Calgary in 1986 (25 years ago), how much would it be worth today? I honestly don't know the answer, but I suspect over that period the average home in Calgary has appreciated more than 100%, even after the market downturn of 2008.

[Phanuthier]

Originally Posted by MarchHare

Out of curiosity, if you had spent $300k on a home in Calgary in 1986 (25 years ago), how much would it be worth today? I honestly don't know the answer, but I suspect over that period the average home in Calgary has appreciated more than 100%, even after the market downturn of 2008.

I ran the numbers - if your property value doubled during a 20 year term you own the property at, your return is 3.5% (which makes sense - it should be ~inflation).

Depending on how you want to say "my mortgage is not a debt, and its different here because _____" where the reason is that you do get returns, then I would say if I take out a loan at 6% fixed, to buy the entire NASDAQ index, I am not in debt because I am making 3.5% as well.

[Devil's Rule]

Originally Posted by Rathji

Of course it wont be worth the money you paid for it if you include interest, especially factoring in inflation.

Just ran a quick calculation on RBC's website. A 5 year term, $300k mortgage at 5% interest over 25 years will cost roughly $600k. (someone correct me if I am wrong), which means you pay twice what your house is worth, not counting the fact that you renew it a few times during that 25 years, and end up paying more in actual dollars, due to inflation.

How much inflation will happen in 25 years? Can't say for sure, but between 1985 and 2010, inflation alone would have turned a $300k home into a $600k home. (source).

So just on those calculations alone, it is pretty much impossible for a house to be worth more in inflation adjusted dollars once the mortgage is paid off. However, you did live in it (or rented it out) for those 25 years, so that is where the benefit comes in.

What do I know though, I am just a tech.

That is one way of looking at it. I'm not really sure where or how that inflation index is calculated, since each geographic region has it's own variation of inflation. I'm also not too fond of looking to the past as to what has happened versus where are we going. Forecasting but being conservative about it.

Check this out using the RBC tools

Take a $300,000 mortgage at 5% fixed for 25 years amortization and you would have paid $523,443 over that time span.

Then if inflation stays at 3% for that same period, in theory your home should now be worth $634,505.

Now if someone bought that same home at the height of home prices, lets say $500,000 with the same mortgage rate of 5% and same amortization period they would have paid $872,406 for the same house.

[bc-chris]

Do you think people with mortgage debt should continue to be categorized as someone with major cc/auto etc debt.

absolutely your mortgage should be considered as debt.

if you want to borrow money for anything, the bank looks at ALL your debt... not all your debt minus your mortgage.

i would imagine that for most people their mortgage payments would be the largest of all their regular monthly payments

This was all spurred because according to the study in the other thread most people between 18-24 feel they will be debt free by 32.

...ha - i bet most of those 18-24 year-olds still live in their parents basements!

[Travis Munroe]

Originally Posted by Sliver

I'm embarrassed for CP this question was even asked.

mentioned by someone else (might have been you) but proper results would have come by adding the word good in front of debt.

[squiggs96]

Originally Posted by Phanuthier

Really? It couldn't be any worse at all?

Challenge accepted.

I have a pickle sandwich which is exactly like a mortgage.

On the serious side, how are student loan debt and mortgage debt so different Realtor1? In both cases a bank gives you money because you don't have enough to purchase what you want. You will hopefully receive more cash into your pockets when the process is complete. For a house it's selling it and for university it's earning more money than when you started. Both can go wrong, with a house being bought at the peak and being sold during a recession; and with a degree the student might not finish it or not be able to find a job. Both can then result in the person moving back in with their parents.

Either way if it's a house or a degree, both require money to be paid back, giving the definition of a debt.

[OldDutch]

Originally Posted by Sliver

I'm embarrassed for CP this question was even asked.

Why? I think it is a great question. The answer is obvious to you, but to many millions in the US and Canada it is not.

People get themselves in trouble because the assume that there are things like "good debt (smiles and nods)" and "Bad Debt (frowns and shakes head)". Bottom line is debt is debt. You have no idea what you are going to sell at years from now, so you cannot assume you will make money and the debt is good. That is a recipie for disaster.

Hence why people go out and buy more property than they can afford. Thinking this is a safe bet. Then they get burned, and it turns out to be very bad debt, maybe worse that CC debt.

The "Good Debt" line of thinking is what happened in the US. Look how that turned out.

Bottom line, is that you should always stick within your means to pay. Would you take a loan out to invest in stocks? Ask yourself that before you buy an investment property (second house, or single house that is outside of your means, etc.) with a loan.

[Cowboy89]

Originally Posted by Phanuthier

I ran the numbers - if your property value doubled during a 20 year term you own the property at, your return is 3.5% (which makes sense - it should be ~inflation).

Depending on how you want to say "my mortgage is not a debt, and its different here because _____" where the reason is that you do get returns, then I would say if I take out a loan at 6% fixed, to buy the entire NASDAQ index, I am not in debt because I am making 3.5% as well.

I think if the question was rephrased to 'Do you consider the amount borrowed to buy a portfolio consisting of S&P 500, TSX 300, Corporate and Government Bond EFTs on margin "debt"?' than the answer would probably be 100% 'yes is is debt.' But yet over a typical mortgage amortization period a portfolio invested like the above should generate superior returns, be better diversified than real estate and won't cost you 'special assesments,' renovations, maintainence etc.

Not calling a mortage 'debt' is a silly rationalization to justify it's existance. Instead borrowing in the form of a mortgage should be justified along the same lines as borrowing to buy anything else. Meaning that there are appropriate reasons to lever yourself to buy Real Estate just as there are non-appropriate reasons.

A mortage shouldn't be broadly defined as 'good' debt either because it all depends on your own personal financial situation and the financial structure of how you are taking one out and how much of the purchase price you are borrowing that would determine whether or not it is 'good' debt?

Is getting into a bidding war on a house and then proceeding to finance the purchase with a 5% down 30 year mortgage with little other assets 'good debt' ?

[MarchHare]

Keeping in mind that I voted "Yes" and absolutely consider my mortgage to be debt, it seems like some people in this thread are treating all debt equally. Consider the following example: who of the following has a worse financial situation (assume they have the same income):

1) John has no consumer debt but owns a home valued at $300k with $200k worth of principle remaining on his mortgage

or

2) Mary has no mortgage debt (she lives in a rented apartment) but owes $100k in various consumer debt (credit cards, car payments, etc.)

[opendoor]

The problem is that people want to boil it down to simplistic terms that don't really explain everything. For one thing, people seem to think that being debt free is necessarily better than having debt which is patently false. To use a similar example to what I brought up in another thread, imagine a 55 year old with no assets living debt free while renting a basement suite compared to a 55 year old with $1 million in positive net worth who has a 3.5% mortgage on a rental house that he has 80% equity in which generates positive income. The 2nd person is technically in debt but I don't think any sane person would argue that the they're not in a financial situation that is several magnitudes better than the 1st person.

To me, the term "in debt" connotes someone who has a negative net worth or has their finances set up in a manner which exposes them to the very real risk of ending up in that scenario (borrowing money for a risky investment, owning a home with low equity, buying a more expensive home than they ought to based on temporarily low interest rates, etc.). A mortage is a debt, no question about it, but when I hear about someone colloquially talking about being in debt, I presume that they are in a situation where they can't meet their obligations without borrowing more money or liquidating assets. A person with a healthy financial portfolio, who has a lot of equity in their home, and who can well afford their mortgage even if interest rates rise doesn't really meet that criteria IMO. To me, they have debt, but they're not in debt.

[Phanuthier]

Originally Posted by MarchHare

Keeping in mind that I voted "Yes" and absolutely consider my mortgage to be debt, it seems like some people in this thread are treating all debt equally.

Consider the following example: who of the following has a worse financial situation (assume they have the same income):

1) John has no consumer debt but owns a home valued at $300k with $200k worth of principle remaining on his mortgage

or

2) Mary has no mortgage debt (she lives in a rented apartment) but owes $100k in various consumer debt (credit cards, car payments, etc.)

I think we all know that there are different types of debt. What people are confusing is the income statement of their personal finances, and the balance sheet of their personal finances.

Consumer debt, I think we can all assume, is bad. Why? Because your cash flow is negative.

Mortgage? Fine. Usually because its budgeted within your cash flow. Its also a inflation-proof investment (Its a minor investment - not the safest, not the best return, not the most liquid, but it has its places)

Car payments? I don't see how its bad either. At a low financing, I'd take a car loan every time and use the money I would have otherwise paid (for the car in cash), invested it in an entire index, and gotten positive return.

Education? Fine. Returns come in (hopefully) higher salary for a career.

Hell, business debts? How about acquisitions, where company A pays for company B in cash and takes out a debt for half of it?

All of them are debts. As Old Dutch said above, there are "good debt (smiles and nods)" and "bad debt (frowns and shakes head)" ... either way, they are debts.

[Devil's Rule]

Many good points are being brought up. I think from the comments and from the polls there is somewhat a consensus that mortgages are debt. But what seems to be emerging are all these sidebar what if scenarios which are really interesting to see.

Like I mentioned in an earlier post, I am of the thought that all debt is bad. However I have used debt strategically to advance my overall net worth position and so far it has worked out fine.
I guess it comes down to how does one handle debt? Just because one can drive doesn't mean they are good at it. I know, it's a bad analogy but it's what came as a thought at this moment.

[THE SCUD]

If you consider your house an asset, you must then consider the mortgage debt, irrefutably.

Thsi thread has also confirmed that I'll never buy anything from this realtor.