- Bee Money Simple
- Posts
- When a Mortgage is a Good Thing
In partnership with
Most of us were raised by our parents to believe that having debt was a bad thing. Debt to buy things that you want, like a car, watch, dinner, or other consumables, is dumb. Most of us would agree that if you have that kind of debt, you need to pay it off as soon as possible.
However, a mortgage on a rental or investment property could be valuable.
You have an asset if you had a 1-million-dollar mortgage on a rental property at 4.5% interest for 25 years to pay it off. In 25 years if you were only paying interest on the debt, you would be using about $290,000 in actual buying power to pay off the $1,000,000. Essentially, you have made an extra $710,000 or 2.15% each year you have the mortgage or 71% over the 25 years.
The return on the mortgage is linked to the rate of inflation. Governments need inflation to get out of debt, so why not join Canada or the United States?
Today, Canada has some 713 billion dollars of debt, and America has 33.6 trillion. The only way for governments to reduce such monumental debt is to inflate it away. When a government issues a 30-year bond, it is interest only. A one-hundred-dollar bond for 30 years is paid back by the government with inflation at 5%, with just $23 in buying power. At 3% inflation, it is just $41.20. Governments understand that over time, the debt will be inflated away. But who will pay for this?
We will. If you invest in a GIC or government bond, you lose money every year. The banks or the government borrow your money and pay you back with dollars that have less value. Before that, you make interest, of course, but it is taxed at the highest rate, over 50% here in Canada. So, the government wins on both counts.
Most of us work to pay off a mortgage as soon as possible. When it comes to investments, I’m not sure that is the right thing to do now.
Governments continue to borrow and spend at historic rates. Inflating the money away is their only strategy. I need to continue to work to understand this. It may be a good strategy for us as well.
It sounds extraordinary to argue that a mortgage could be an asset, but it may make sense today.
Ease into investing
“Ease” being the key word. With automated tools like portfolio rebalancing and dividend reinvestment, Betterment makes investing easy for you, and a total grind for your money.