Debt: Good debt, bad debt, and the mortgage question

Some debt costs you money. Some debt makes you money. The difference determines whether paying it off early is smart — or a mistake.

The uncomfortable truth about debt

Personal finance culture has a complicated relationship with debt. Some voices treat all debt as a moral failing to be eliminated as fast as possible. Others wave away any concern with the phrase "it's good debt." Both positions are wrong.

Debt is a tool. Like any tool, it can be used well or poorly. The key question isn't "do I have debt?" — it's "what is this debt costing me relative to what I could earn with that money elsewhere?" That one question explains most of what you need to know about which debts to prioritise, which to leave alone, and why your mortgage probably belongs in a different category from your credit card.

What makes debt "bad"

Bad debt has two defining features: a high interest rate and no asset to show for it. Credit card debt is the textbook example. You borrowed money to buy something that's already been consumed — a holiday, a restaurant meal, a phone that's now worth half what you paid — and you're now paying 20–28% APR on the balance. The thing you bought isn't earning you anything. The interest compounds against you every month.

High-interest consumer debt — credit cards, payday loans, high-rate personal loans — is almost always worth prioritising above everything else, including investment contributions above any employer match. The maths are straightforward: paying off 22% interest is a guaranteed 22% return. Nothing in a diversified investment portfolio delivers that reliably.¹

The threshold most financial planners use is around 7–8% APR. Below this rate, investing the money often outperforms early repayment based on historical equity returns. Above 8%, early repayment increasingly wins — and above 15%, it should almost always take priority over everything except a minimum pension or 401(k) contribution to capture any employer match. The avalanche vs. snowball article covers how to order repayment once you've decided to pay down debt aggressively.

What makes debt "good"

Good debt, properly defined, has a low interest rate and funds something that either retains value or generates income. A mortgage on a property that appreciates in value. A student loan that funded qualifications that meaningfully increased your earning power. A business loan that generated returns above the cost of borrowing.

But "good debt" is not a blanket permission to be comfortable with debt. It's a relative judgement based on interest rate and what was purchased. A mortgage at 3% is probably good debt — investing the equivalent of overpayments at historical equity returns of 7–9% real likely outperforms the interest saved. A mortgage at 7% is much closer to neutral, and whether to overpay depends on your risk tolerance and investment returns.³

The mortgage question

Your mortgage is handled differently in the 100 Great Years debt widget — it appears in your total liabilities for net worth purposes, but it's excluded from the paydown simulator by default. This is an intentional product decision, and it's worth explaining why.

The core argument against aggressive mortgage overpayment in most rate environments is opportunity cost. Every extra payment on a 3.5% mortgage is an investment returning 3.5% guaranteed and tax-free. That's not bad — but it's likely below what a diversified equity portfolio returns over the same period. Historically, global equity markets have returned 7–9% annually in real terms over long periods.⁴ If that continues, overpaying a low-rate mortgage costs you the difference in expected returns.

There's also a liquidity argument. Mortgage overpayments lock money into an illiquid asset. If circumstances change — job loss, medical expense, opportunity — you can't access that equity easily. Keeping money in an accessible investment account preserves optionality.

The argument for overpaying a mortgage is also legitimate and largely psychological. Owning your home outright provides genuine peace of mind. If a market crash wiped out the value of your investments, you'd still own your home. Some people sleep better knowing that, and the value of that security is real even if it doesn't show up in a spreadsheet.

The platform's position: in most rate environments, especially below 4–5%, the mathematics favour investing over mortgage overpayment. But if paying off your home is a genuine priority for you — for peace of mind, for simplicity, for what it means to your family — you can include your mortgage in the simulator. The platform shows you the cost of that choice without judging it.

Rental property mortgages are different again

If you have a mortgage on a rental property, it belongs in a different category entirely. That mortgage is a business liability offset by rental income. It funds an asset that (ideally) generates a yield above its borrowing cost. Including it in a personal debt paydown plan doesn't make sense — it's not a personal liability in the same way, and paying it down early might reduce your tax efficiency depending on your jurisdiction.

This is why rental mortgages are excluded from the Debt widget's paydown simulator altogether. They appear in your net worth calculation (as a liability offset against the property value) but not in your personal debt strategy. If you're a landlord trying to optimise your property portfolio, that's a conversation for a specialist adviser.

A practical framework

When looking at any debt, ask these three questions in order:

• What is the interest rate? Above ~8%, prioritise repayment aggressively. Below ~4%, consider investing instead. Between 4–8%, it depends on your risk tolerance and other factors.
• What did it fund? Consumed experiences or goods = bad debt by default. Assets that retain value or generate income = potentially good debt, depending on the rate.
• What's the alternative? The real cost of overpaying a 3% mortgage isn't 3% — it's the difference between 3% and what you'd earn investing that money. Always compare to the next best use of the money.

The 100 Great Years debt widget applies this logic automatically: it flags high-interest debt, recommends which to tackle first, and handles your mortgage separately. The underlying principle is always the same — your money should be working as hard as possible, and that sometimes means keeping a low-rate mortgage rather than paying it down early.

The 100 Great Years perspective

The platform's goal is never to minimise your total debt at all costs. It's to optimise your financial journey toward independence — which means having your money work as efficiently as possible at every stage. Sometimes that means attacking debt aggressively. Sometimes it means leaving a low-rate mortgage exactly where it is and directing every spare pound or dollar toward investments. The right answer is almost always in the numbers, not in the feeling.

²

³

⁴

⁵

⁶

See how your debt is affecting your wealthspan

Get your free Health and Wealth scores in 5 minutes.

This article is for educational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Always consider your personal circumstances and consult a qualified financial adviser before making investment decisions.