Not all debt is the same.
A $50,000 mortgage and a $50,000 credit-card balance count identically on a balance sheet. They are not the same debt. The categorisation that separates them is more useful than the headline total.
Two axes: secured / unsecured, productive / consumption
Two binary properties classify household debt into four quadrants:
- Secured debt is backed by an asset the lender can repossess if you default. Unsecured debt is not. Secured debt is cheaper because the lender's recovery in default is partially guaranteed.
- Productive debt finances an asset that is expected to appreciate, generate income, or both. Consumption debt finances current spending. The distinction is functional, not legal.
The four quadrants
| Quadrant | Examples | Typical rate | Wealth effect |
|---|---|---|---|
| Secured productive | Mortgage, investment-property loan, business loan secured against equipment | 5–7% | Net positive over time (asset appreciation + income) |
| Secured consumption | Car loan, secured personal loan | 7–11% | Net negative (asset depreciates faster than principal pays down) |
| Unsecured productive | Student loan (HECS/HELP, Stafford), unsecured business loan | 5–9% | Mixed — depends on income return on the qualification financed |
| Unsecured consumption | Credit cards, BNPL with interest, payday loans | 17–24%+ | Strongly net negative (high rate, no offsetting asset) |
Why the categorisation matters for net worth dynamics
Two households with $40,000 of debt look identical on a balance sheet. They are not equivalent:
- Household A: $40,000 of secured productive debt (a mortgage on a home that has appreciated 4 % per year for the last decade). Net worth grows when the asset appreciation rate exceeds the borrowing cost.
- Household B: $40,000 spread across two credit cards at 22 % APR. Net worth shrinks every month the balance is unpaid, because there is no offsetting asset.
Both have $40,000 of debt. Household A's debt is helping their net worth; Household B's is destroying it. The headline figure obscures this.
The arbitrage opportunity (when it exists)
The classic case for keeping “productive” debt rather than aggressively paying it down: if your mortgage rate is 4 % and your taxable investment portfolio expected return is 7 % real, the spread (3 percentage points) is a positive expected-value arbitrage. Aggressively paying down the mortgage forfeits the spread.
The pay-down priority order
For a household with multiple debts, the rate-arbitrage logic implies:
- Always pay first: any unsecured consumption debt above 10 % APR. The probability that an investment portfolio will outperform 10 %+ guaranteed payback in real terms is low.
- Pay early when possible: secured consumption debt (car loans). The asset is depreciating against the loan; faster pay-down raises net worth.
- Pay normally: unsecured productive debt at low rates (HECS/HELP at the indexation rate is roughly inflation-only and is functionally interest-free).
- Optionally accelerate: secured productive debt (mortgage). Depends on your investment-return assumption and risk tolerance — the arbitrage exists but is not free.
What the calculator does and doesn't show
The calculator's debt-as-percent-of-assets ratio treats all debt equally. This is correct for a balance-sheet snapshot. It does not capture the productive/consumption distinction; for that, you need to look at the rate, the asset on the other side (if any), and the term. The calculator's role is enumeration; the categorisation work is yours.