Is there a word for fear of debt “Call it debt phobia,” says Lorne Bozinoff, president of Forum Research Inc., which found, in a poll commissioned for the Financial Post, that 55% of Canadians do not believe personal debt can be used to build wealth.
They're fine with some debt, 76% of respondents saying there is such a thing as good debt. I guess that can be categorized as money used for buying a house or an education. But what about starting a business, buying a car to get you to it, and borrowing to invest to take advantage of low interest rates, high dividend yields and preferential tax treatment
Half of Canadians in our survey said debt should not be used for investment purposes, even though the interest on such loans is tax-deductible and any capital gains achieved are taxed at a lower rate.“They are reading horror stories about people getting into too much debt and they hear all the horror stories in Europe. It's different because it is not personal but it feeds the idea that debt can be dangerous,” Mr. Bozinoff says.
Benjamin Tal, deputy chief economist with CIBC World Markets, says it's probably a “good thing” some people are so opposed to debt because they are not ready for it. On the other hand he thinks about a quarter of the population could easily take on more leverage.
The Forum Research Survey supports his contention. While the average debt load in Canada is $156,000, 38% of Canadians have no debt at all and that includes not having a mortgage, says the survey.
“Debt is a good thing as long as it is used responsibly. The issue is do you want to take advantage of this low interest rate environment to borrow to invest. If you lose this money on this investment are you going to lose your house If the answer is no, then it's not such a big deal,” Mr. Tal says.
There is no question our society is built on debt.
“Can you imagine a society without debt, this is a society in stagnation,” he says. “Debt serves a purpose, it is the oil in the machine.”
Indeed debt makes up more than 150% of Canadian household income — calculated as taking all of your debt, including your long-term mortgage, and dividing by your total household income after taxes.
For wealthier Canadians, borrowing to invest is less of a tough sell. Among people with over $100,000 of income, 61% have borrowed to invest in real estate, stocks, bonds or RRSPs compared to 32% for those with income under $20,000, says the Forum survey.
Thursday's survey comes just as a new report from credit agency TransUnion shows personal debt climbed in the second quarter, albeit slowly. Credit card spending was down, lines of credit and installment loans too, but auto financings jumped.
A car loan is a great example of debt many of us take on, perhaps something that can be characterized as both good and bad debt.
“Maybe there is room for a third category,” said author and financial educator Talbot Stevens. “How do you categorize borrowing for a vehicle that gets you to a job that makes you more money, the challenge I get to is what about the second and third vehicle”
Exactly, a vehicle sitting in the driveway six days a week — I had one of those for two years — doesn't make a lot of sense. I'd call it questionable debt, if you are buying a car for leisure.
“Is the borrowing going to increase your income If not, it's probably not good debt,” says Mr. Stevens, who thinks leveraged investing can make sense for some Canadians.
He says many Canadians are discouraged from leveraged investing because they think returns must exceed the interest rate on investment. The tax advantages one gains from investing in equities means you need only returns of about two-thirds of your borrowing costs.
“If the average cost of borrowing over 10 years is 6%, you would need only 4% before-tax equity returns (or higher) to benefit from leveraging. Does anyone think equities will average 4% returns over the coming decade, after the one we just had” he asks.
Mr. Talbot agrees most investors should be cautious when using leverage.
“More often it hurts investors due to the reality they have this built-in hardwiring that cause them to behave in silly ways — they don't buy low and sell high,” he says. “[Debt] can be an effective thing, same as a vehicle. We all know if we have a vehicle we can get from A to B faster but you have to drive responsibly. That's why most people are better off not leveraging.”
At the end of the day, he's probably right. Those people who can't handle more debt should stay away from it. But it shouldn't stop the rest of us.