Why You Need More Debt in Your Life

A fresh look at good debt versus bad debt, and why the right kind of borrowing might be the fastest path to financial freedom.

Mention the word "debt" at a dinner party and watch the room divide. Half the guests recoil as if you suggested setting fire to their savings account. The other half, usually the quieter ones, nod knowingly. They figured out the difference between borrowing to consume and borrowing to build a long time ago.

Conventional financial advice tells you to eliminate debt as quickly as possible. Pay off the mortgage. Cut up the credit cards. Live within your means. Sensible guidance when applied to consumer debt. But as a universal rule, it ignores something fundamental about how wealth is actually created.

Every publicly listed company on the NZX carries debt. Every major property portfolio in the country was assembled with borrowed capital. Nearly every business owner reading this started with someone else's money, whether from a bank, an investor, or a line of credit. Debt, when directed toward income-producing or appreciating assets, is not a burden. It is a tool. And for many New Zealanders, it is one they are not using enough.

A necessary qualifier: this article might be relevant to households with stable income, surplus cash flow after expenses, and a long time horizon. If you are carrying high-interest consumer debt, living pay to pay, or uncomfortable with investment volatility, the priority is eliminating bad debt and building an emergency fund, not taking on more borrowing. Everything below assumes a foundation of financial stability is already in place.

The Real Divide: Good Debt Versus Bad Debt

Labelling all borrowing as reckless is about as useful as labelling all food as unhealthy. The distinction matters enormously.

• ‍Bad debt finances things losing value from the moment you swipe: credit card balances carried at 20 percent, car loans on depreciating vehicles, buy-now-pay-later splurges on items forgotten by next month. This type of borrowing transfers your future income to someone else's balance sheet without putting anything productive in yours.‍
• Good debt does the opposite. It funds the acquisition of assets expected to grow in value or generate income exceeding the cost of borrowing. A mortgage on a well-located rental property. A business loan for equipment allowing you to take on more clients. An investment loan deployed into a diversified global equity portfolio. The borrowed money is put to work, and the returns are intended to outpace the interest paid.

New Zealand's financial regulator, the Financial Markets Authority, emphasises suitability and risk understanding in all borrowing decisions, and rightly so. The risk profile of a 22 percent credit card balance is categorically different from a 6 percent mortgage against a property generating $600 per week in rent. Both carry the word "debt," but they sit in entirely different universes.

How Leverage Amplifies Returns (In Both Directions)

Leverage is the formal term for using borrowed money to increase exposure to an asset. It is how a $200,000 deposit controls a $1 million property. And it is how moderate returns on the underlying asset translate into outsized returns on the capital actually invested.

A New Zealand property example. You purchase a rental for $800,000 with a $200,000 deposit and a $600,000 mortgage. If the property increases in value by 5 percent over a year, the gain is $40,000. On the total asset, the return is 5 percent. On your $200,000 of equity, the return is 20 percent.

The same principle works in reverse. A 5 percent decline wipes $40,000 off the value, representing a 20 percent loss on your equity. Buyers who purchased at the peak of the 2021 market and found themselves in negative equity learned this acutely. Leverage does not care about your feelings. It amplifies both directions with equal force.

Property Leverage and Share Leverage Are Not the Same

New Zealanders understand property leverage instinctively because we have been doing it for generations. Some assume the same mechanics apply seamlessly to shares and managed funds. They do not, and the differences matter.

Mortgage debt is typically repaid over 25 to 30 years through structured principal-and-interest payments. The bank cannot force you to sell your property because its market value dipped temporarily. Your repayment obligations remain fixed (or adjust with refixing), and as long as you meet them, the asset is yours.

Margin lending against shares operates very differently. If the value of your portfolio falls below a certain threshold, the lender issues a margin call, requiring you to deposit additional cash or sell holdings immediately. Interest rates on margin loans are typically higher than mortgage rates, there is no standard amortisation schedule, and the lender has the right to liquidate your positions without your consent if you cannot meet the call. In a sharp market downturn, this can crystallise losses at the worst possible moment.

This does not mean borrowing to invest in shares is never appropriate. It means the structure, the risk controls, and the temperament required are more demanding than those for property lending. Anyone considering leverage against financial assets should work with a qualified adviser who understands both the mechanics and the behavioural pitfalls.

Inflation: The Silent Partner of Every Debtor

Here is something rarely discussed: inflation systematically benefits borrowers and penalises savers. Over time, rising prices erode the real value of a fixed debt obligation. A $500,000 mortgage taken out today will be repaid in future dollars worth progressively less.

Research from the Federal Reserve Bank of St. Louis found unexpected inflation creates a significant wealth transfer from creditors to debtors: your lender gave you $500,000 of purchasing power today, but you repay it over decades in gradually cheapened currency.

A New Zealand caveat. Unlike the United States, where 30-year fixed-rate mortgages are standard, most New Zealand borrowers refix every one to five years. This means Kiwi borrowers are more exposed to interest rate repricing than their American counterparts, and the inflation benefit is partly offset by rate resets. The spread between your borrowing cost and long-run investment returns still matters, but modelling it requires local assumptions, not imported American ones.

New Zealand household debt sits at roughly 166 percent of disposable income. Politicians and commentators often cite this figure with alarm. What they rarely mention is household net wealth has been rising alongside it. Much of the country's debt is secured against assets growing faster than the obligations themselves. Context matters.

Debt Recycling: New Zealand's Overlooked Opportunity

Australia has practised debt recycling for decades. New Zealand is now catching on.

How it works. You accelerate repayments on your non-deductible home loan, then re-borrow the repaid amount and deploy it into income-producing investments. Over time, your total debt stays roughly constant, but its composition shifts from non-deductible "bad" debt toward tax-deductible "good" debt. In the eyes of the Inland Revenue Department, interest on money borrowed for income-producing assets is generally deductible, while interest on your family home is not.

A worked example. Assume a household earns $180,000 combined, owes $500,000 on the family home at 6 percent, and has $30,000 in annual surplus cash flow. Without debt recycling, the surplus goes directly into the mortgage. The home loan shrinks, no investment portfolio is built, and none of the interest is deductible.

With debt recycling, the surplus still pays down the mortgage, but the equivalent amount is re-borrowed into a separate investment facility. The total debt remains $500,000, but now a growing portion of the interest is deductible. The investment portfolio compounds alongside the mortgage repayment. After 15 or 20 years, the household ends up with both a paid-off home and a meaningful pool of invested assets, rather than just the home.

Assessing debt recycling under New Zealand conditions requires a sharp focus on local tax rules and interest rates. Importing Australian or American assumptions rarely paints an accurate picture for Kiwi borrowers. In particular, New Zealand's lack of a broad-based capital gains tax on shares (outside the FIF regime for offshore holdings) creates a different calculus from what appears on most international finance blogs.

The critical moving parts are loan structure, record-keeping, and temperament. The IRD requires a clean paper trail linking borrowed funds to income-producing assets. Mixing personal spending through the same revolving credit facility is a fast route to voided deductions and an uncomfortable conversation with an auditor. This is not a weekend project. Professional structuring is essential.

If debt recycling sounds relevant to your situation, our team can help assess whether the structure and numbers work for your household. Book a complimentary initial chat here.

When Productive Debt Does Not Work

Intellectual honesty demands acknowledging when leverage backfires. Not every disciplined borrower comes out ahead, and ignoring this reality would be irresponsible.

• ‍Negative cash flow in a high-rate environment. In New Zealand right now, many rental properties and leveraged equity positions carry a negative cash flow: the cost of borrowing exceeds the income the asset generates. This is sometimes called negative gearing. For property, the shortfall may be partly offset by tax deductions on allowable expenses (interest, maintenance, council rates, insurance). But a tax deduction is not the same as a positive cash flow. You still need to fund the gap from other income, and if rates rise further or tenancy gaps appear, the shortfall widens.‍
• Sequence of returns risk. Borrowing $100,000 to invest in a diversified portfolio sounds reasonable when long-run returns average 8 percent. But averages disguise timing. If the first three years deliver a 20 percent cumulative drawdown while you continue paying 6 percent interest, the mathematics punishes you even if the market eventually recovers. Investors who panic and sell during a drawdown crystallise the loss and never benefit from the recovery.
• ‍Structural mismatch. Debt-funded investing can underperform when interest rates rise faster than expected, when the investor's income becomes unstable (redundancy, illness, relationship breakdown), or when the borrowed funds are deployed into concentrated or speculative positions. A well-diversified, low-cost portfolio is a very different proposition from a margin-funded punt on a single growth stock.

The lesson is to stress-test the structure before committing, hold a liquidity buffer for when conditions turn, and maintain the emotional discipline to stay the course.

The Corporate Playbook Households Ignore

Every successful company borrows. Fisher & Paykel Healthcare, Mainfreight, and Auckland International Airport all carry debt despite generating substantial free cash flow. They borrow because debt is cheaper than equity, interest is deductible, and idle capital is a wasted resource. This logic is uncontroversial in a boardroom. It becomes controversial the moment someone suggests applying it to a household.

The disconnect is largely emotional. Generations of New Zealanders grew up hearing about "burning the mortgage" as the ultimate financial milestone. Eliminating the home loan is a worthy goal, but treating it as the only goal can create a blind spot.

A household with no debt and no investments at age 55 is not nessecarily wealthy. It might simply be sitting on a single illiquid asset producing no income. Financial planning should account for the full picture: home equity, investable assets, insurance, KiwiSaver, income and asset trajectory, and potentially, appropriate use of debt. The wealthiest families in New Zealand typically hold a mix of property, business interests, and financial assets. Almost all of them used leverage at some point to get there.

Patterns We See in Disciplined Borrowers

Having advised thousands of New Zealand households, certain habits distinguish those who use debt productively from those who come unstuck:

They only borrow for assets with a reasonable expectation of growth or income. A rental property in a high-demand area qualifies. A new boat does not. If the asset cannot service or justify the debt over time, they walk away.

They stress-test at higher interest rates. Modelling cash flow at rates two to three percentage points above the current level reveals whether a position has a buffer or is running on fumes. If the numbers collapse under modest rate increases, the position is too aggressive.

They keep separate loan facilities. Deductible and non-deductible debt never run through the same account. Clean separation protects the tax position, simplifies record-keeping, and makes the structure auditable if the IRD comes calling.

They maintain a liquidity buffer. Leverage without cash reserves is fragile. Disciplined borrowers hold enough liquid savings to cover several months of loan repayments and living expenses before taking on investment debt.

They get professional advice before committing, not after. Structuring productive debt involves tax, lending, and investment decisions working in concert. A mortgage broker, a financial adviser, and an accountant should all be part of the conversation before anything is signed.

The Behavioural Trap: Why "Debt-Free" Can Cost You

Behavioural finance research consistently shows people feel the pain of losses roughly twice as intensely as the pleasure of equivalent gains. Psychologists call this loss aversion, and it explains why the idea of taking on debt, even productive debt, triggers anxiety in otherwise rational people.

The emotional pull of being "debt-free" is powerful. It feels like safety. But consider the opportunity cost. A household spending 15 years aggressively paying down a 6 percent mortgage while ignoring equity markets returning 8 to 10 percent over the same period has chosen certainty over growth. The mortgage is gone, but so is a decade and a half of compounding returns.

New Zealanders possess a cultural obsession with residential property, and for good reason: housing has delivered strong long-term returns. But stripping away the emotion and looking at net yields after council rates, maintenance, insurance, and interest costs, many discover listed equities provide a compelling long-run alternative.

The wealthiest households diversify across asset classes, and productive debt is sometimes the mechanism enabling the diversification.

Frequently Asked Questions

What is debt recycling and does it work in New Zealand?

Debt recycling involves repaying non-deductible home loan debt and re-borrowing the same amount for income-producing investments. The total debt stays similar, but the composition shifts toward tax-deductible borrowing. It works in New Zealand but requires precise loan structuring, diligent record-keeping, and professional guidance to keep the IRD satisfied.

How much debt is too much?

There is no universal answer. The right level depends on income stability, interest rates, asset quality, risk tolerance, and cash reserves. A useful benchmark: if a two to three percentage point rise in interest rates would cause genuine financial distress, the position is likely overextended.

Should I pay off my mortgage or invest?

It depends on the spread between your mortgage rate and expected investment returns, your risk tolerance, and your time horizon. Mathematically, investing often wins over the long term if returns exceed borrowing costs after tax. Behaviourally, some people sleep better with a smaller mortgage. The right answer is the one you can stick with for 20 years without losing your nerve.

Why You (Might) Need More Debt in Your Life

Debt is a tool. Like any tool, it can build something lasting or cause serious damage depending on who holds it and how.

For households with stable income, surplus cash flow, and a long time horizon, treating all borrowing as a villain to be vanquished leaves real opportunity on the table. The wealthiest families in New Zealand and globally understand the distinction between borrowing to consume and borrowing to build. They use leverage deliberately, structure it carefully, and compound the results over decades.

For some households, eliminating all debt early can limit financial flexibility compared with a balanced approach combining mortgage reduction, diversified investing, and disciplined use of productive leverage.

If you are ready to explore how productive debt might fit your own wealth-building plan, (or to check that it doesn't!), get in touch for a complimentary initial consultation. It might be the most valuable conversation you have this year.