Not all debt is created equal — learn which debts build wealth and which destroy it
Enter a debt and we'll classify it and give you a priority score.
KOHO helps you stick to your budget with real-time spending insights and automatic savings. No fees, no overspending, no excuses.
Get KOHO Free — Code 45ET55JSYAThe terms "good debt" and "bad debt" are useful mental shortcuts, but the reality is more nuanced. A better framework: debt that builds net worth or generates income is acceptable; debt that funds depreciating assets or consumption should be minimized or eliminated.
Mortgage on your principal residence: Canada's housing market has historically appreciated 5–7% annually in major cities. Your mortgage lets you control a leveraged appreciating asset. Interest is not tax-deductible (unlike the US) but capital gains on a principal residence are tax-exempt in Canada — one of the most powerful tax advantages in the Canadian tax code.
RRSP loan: Borrowing to maximize an RRSP contribution at the start of the year can be mathematically excellent. The tax refund (often 30–45% of the contribution) can immediately pay down the loan. The remaining loan at 6–8% is offset by RRSP growth and the deferral of tax. Use our net worth calculator to see the impact.
Student loans: With federal loans now at 0% interest, Canadian student debt is among the least expensive borrowing available. A degree that genuinely increases earning power pays itself back many times over. The caution: not all degrees have equal ROI, and lifestyle debt disguised as "education expenses" is still bad debt.
Business loans: Borrowing to grow a business that generates income — equipment, inventory, working capital — is genuinely productive debt. Interest paid on income-producing borrowing is tax-deductible for Canadian businesses and self-employed individuals.
Investment loans (using Smith Manoeuvre): Borrowing via HELOC to invest in non-registered income-producing investments can convert non-deductible mortgage interest into deductible investment interest over time. Complex; requires professional advice.
Credit card balances (19.99–29.99% APR): The worst widely-available debt in Canada. If you're carrying a balance, you're paying the equivalent of 20–30% guaranteed return to pay it off — better than any investment available. Pay it off before investing in anything except your employer's RRSP match.
Payday loans (391–600% APR): See our payday loan alternatives guide. Never acceptable except in a genuine emergency with a plan to exit immediately.
Car loans for depreciating vehicles: A new car loses 20–30% of its value in year one. Financing a $45,000 truck at 7.99% over 84 months to drive to an office job is pure consumption debt. Buy a reliable used vehicle with cash when possible.
Financing lifestyle expenses: Vacations on credit, furniture on "no interest if paid in 24 months" (with a deferred interest trap), BNPL (Buy Now Pay Later) services — these fund depreciating or consumed goods at high effective rates.
| Ratio | Definition | Canadian Benchmark |
|---|---|---|
| GDS (Gross Debt Service) | Housing costs / gross income | Max 39% for mortgage qualification |
| TDS (Total Debt Service) | All debt payments / gross income | Max 44% for mortgage qualification |
| Consumer debt / income | Non-mortgage consumer debt / annual income | Under 15% is healthy; over 40% is concerning |
The average Canadian household debt-to-income ratio reached 185% in 2025 — meaning $1.85 in debt for every dollar of disposable income. This is primarily mortgage debt, which is "good" by the framework above, but it does mean Canadian households are extremely sensitive to interest rate changes.