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The only good debt is dead debt

The only good debt is debt you take on for investment. Unless you run your own business, that begins and ends with an affordable mortgage to buy property.

Get out of debt of any other kind, as soon as you can. Pay it off! Kill it dead!

  • Borrowing to invest in shares is too risky. The market goes up over the long-term, but shares are volatile, and stocks could easily go down over the 3-5 year time period of a personal loan, forcing you to sell at a loss.
  • Very occasionally debt might be acceptable if you need to buy something to earn more money, and you really can’t save it up. For instance, you may need specific training to upgrade your job, or buying an ice cream van could whip up a fortune. (Don’t laugh, it worked for Duncan Bannatyne.)

You’ll have to use your judgment here. Buying a sports car with debt to impress your boss doesn’t count!

Why is mortgage debt okay?

The reason that that mortgage debt is good debt is that over the long term house prices tend to rise.

Over any ten year period houses have at least kept their value. A mortgage is for 25 years or so, over which time house prices might double or triple.

When you buy a house with a mortgage, you benefit in three main ways.

Utility

You have somewhere to live, that you are in control of.

Rising value

House price inflation combats the pernicious effect of compound interest on your debt. If house prices are rising 5% a year and your mortgage rate is 5%, your asset is rising as fast in value as your debt is growing.

Future asset

When you buy a house with a mortgage, you end up with a future asset that you own – for most people their biggest asset of all. In contrast, when you rent, buy a hamburger, or go on holiday to the Maldives, you’re just consuming; you’ll get no future financial value out of it. (Possible exception – borrowing to pay for study).

A mortgage is a dead debt, by the way…

Perhaps you think though my headline is misleading. Didn’t I say the only good debt was dead debt?

I did, but that’s because I happen to have learned along the way what the word mortgage means.

It turns out it comes from two parts:

  • The French word mort which means dead.
  • The Old English word gage, which means pledge.

So mortgage means ‘dead pledge’. Close enough!

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Filed under: Spending

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