Good Debt vs Bad Debt

Debt is often seen as a dirty word—but not all debt is created equal. While high-interest credit card balances can wreck your finances, some debt can actually be beneficial. So, what’s the difference between good debt and bad debt, and where does your mortgage fit into the equation—especially if you live in Ontario, where home prices and interest rates are always in flux?

Let’s break it down.

What Is Good Debt?
Good debt is money borrowed for something that has the potential to increase in value or generate long-term income. Common examples include:
- Mortgages
- Student loans
- Business loans
These types of debt can help you build equity, increase your earning potential, or create financial leverage.

What Is Bad Debt?
Bad debt is typically high-interest borrowing used to purchase depreciating assets or fund lifestyle choices that don't offer long-term value. This includes:
- Credit card balances
- Payday loans
- Auto loans (in some cases)
Bad debt can quickly spiral out of control and leave you financially vulnerable.

So, Is Your Mortgage Good or Bad Debt?
Generally, your mortgage is considered good debt—especially in Ontario, where real estate tends to appreciate over time. Your home is a tangible asset, and your mortgage payments help you build equity rather than just throwing money away on rent.

However, the lines can blur depending on your interest rate, financial goals, and lifestyle.

Reasons to Pay Off Your Mortgage Early
- Peace of Mind: Eliminating your largest monthly expense can be emotionally freeing and reduce financial stress.
- Interest Savings: Even at lower rates, you save thousands in interest by paying down your mortgage faster.
- More Cash Flow in Retirement: No mortgage = more flexibility later in life.
- Guaranteed Return: Paying off debt is a guaranteed return equal to your interest rate—something hard to find in the market right now.

Reasons Not to Rush Paying It Off
- Low-Interest Rates: If your mortgage rate is under 3-4%, you might earn more by investing that extra money elsewhere.
- Liquidity Matters: Once you pay off your home, that money is tied up. In emergencies, cash is king.
- Tax Considerations: Unlike in the U.S., Canadian mortgage interest isn’t tax-deductible—so there's no tax incentive to carry a mortgage.
- Opportunity Cost: Aggressively paying off your mortgage might mean sacrificing RRSP, TFSA, or RESP contributions, which can offer higher long-term returns.

Specific Considerations for Ontario Homeowners
- Home Prices Are High: Many Ontarians carry large mortgages. The emotional drive to be "mortgage-free" is strong—but so is the potential to use home equity wisely.
- Interest Rates Are Rising (or Could Be): Locking in lower rates now could make early repayment more appealing.
- Investment Property Boom: In hot markets like Toronto and Ottawa, some use low-interest mortgages to fund rental investments. This changes the calculus since rental mortgage interest is tax-deductible.

Final Thoughts: Balance Is Key
Paying off your mortgage early isn’t an all-or-nothing decision. Many Ontarians strike a balance by:
- Making bi-weekly payments
- Using lump-sum prepayments each year
- Staying invested in RRSPs and TFSAs
- Keeping a liquidity buffer

Remember, the best financial decision is one that aligns with your values, risk tolerance, and long-term goals. For some, being mortgage-free is worth the peace of mind. For others, smart investing alongside manageable mortgage payments builds the best path to wealth.

Want a personalized strategy? Talk to a financial advisor who understands the Ontario housing market and can tailor advice to your situation.