Why is a mortgage considered 'good debt' – and is that actually the case?

In a society that is geared towards getting on the property ladder at any cost, it can be easy to forget that a mortgage is another form of debt.

So many of us have been taught that owning property is the be-all and end-all, the thing to aspire to, an undeniable marker of adulthood, progression, success. But people don’t always consider the risks of taking on such a huge financial commitment. Or the fact that it actually means you will owe the bank hundreds of thousands of pounds.

‘Getting into a mortgage agreement may well be the most important financial decision of your life,’ explains Jon Ostler, CEO of personal finance comparison site finder.com.

‘It is a financial commitment that will last for many years, so don’t be overly ambitious with what you can afford.

‘Set realistic goals based on what is realistic for you and make sure you really like the property you’re buying.’

Jon knows how important it is to take a mortgage loan seriously and not rush in to something, because the consequences could be significant. The most obvious major drawback of a mortgage is that you are carrying a seriously enormous debt over a long time – and you’ll always pay back a lot more than you borrowed.

Although the monthly amount you’re paying may feel completely reasonable, the total amount you pay back over the years is huge.

‘For example, someone who borrowed £160,000 over a 25-year term would repay £280,600 in total once interest is added on,’ reads the Money Supermarket website.

On top of this, you’ll also be charged fees whenever you take out a new mortgage, or remortgage a property, and you’ll be charged conveyancing costs for legal work required with your mortgage.

If you don’t keep up with your monthly payments and additional costs, you could lose your home. The bank or building society will repossess the property and then sell it to recover their money.

But not all debt is created equal, and some say that a mortgage would always be considered ‘good debt’.

‘It’s an investment that typically leaves you better off in the long-term,’ explains Jon.

‘Generally speaking, you are likely to save more money with a mortgage over renting, and when you combine this with the strong possibility that house prices will continue to rise over a standard 30-year term, it’s a sensible investment for your future.’

So, if debt exists on a hierarchy of good to bad, how do we cut through the societal stigmas to find out which kind of debt is genuinely better than the others?

As we have written about this month already, there is a lot of shame and judgement attached to being in debt, but these attitudes are normally reserved for credit card debt, pay day loans, or buying items on finance – never mortgages.

Is this simply classism rearing its ugly head? A snobbish aversion to certain forms of debt that largely impact the working classes? Or is there some truth in this hierarchy of owing money?

‘”Good debt” is money borrowed to purchase an asset that, over time grows in value. This, opposed to “bad debt” which is money borrowed to purchase something that decreases in value,’ explains Paul Flavin, managing director of Mortgages Online.

‘Lets take a look at this in more practical terms.

‘Bad debt would be a loan to fund a new car.

‘On average a new car depreciates 50-60 per cent over the first three years so, you get a loan to purchase a new car for £30,000 and three years later that car is worth only £12,000, yet the loan to purchase it over three years has cost you circa £34,000 with interest.

‘Sell the car at the end of year three and ownership has cost you £19,000-£22,000 without running costs.

‘Now compare, this to the purchase of a new home.

‘In October 2016 the average house price was £228,850, yet in June 2019 this had risen to £242,664, and that’s over a relatively flat period in house price growth.

‘If we look over the longer term, say 20 years, the average house price was £146200, 20 years later and it’s nearly £100,000 increase in value.

‘Yes, you’ve got to factor in mortgage payments but, you’d be renting if you weren’t paying a mortgage.’

But what about the fact that we are living in a period of economic uncertainty with no foreseeable end in sight? Paul thinks that even taking into account the detrimental impact that political turmoil is having on the economy, mortgages are still a safe bet.

‘Viewed over the long-term, I honestly believe that mortgage will remain to be a great debt to have as that asset will always increase over the long term,’ he explains.

‘There’s a Chinese proverb that goes; the best time to plant a tree was 20 years ago. The second best time is now – I always think that this applies to the housing market so, go sign up for some “good debt”.’

But, before you go rushing in to sign up for this wonderful debt, it’s important to remember that even the best debt can go bad.

How many people have their homes repossessed?

In August, the Ministry of Justice reported mortgage possessions claims (the first step in the legal process of taking ownership of a home after mortgage arrears reach a critical point) are up by  39 per cent in the three months to June this year compared with the same quarter last year.

Around 6,180 households had mortgage possessions claims made against them between May and July this year.

It’s the fourth consecutive increase in the number of claims made after a three-year period of stability, despite the fact that repossession is the last-resort action taken by lenders.

The Money Charity has calculated that a property is now repossessed in the UK every 94 minutes.

Just because a mortgage is ‘good’ debt, that doesn’t mean things can’t go wrong, and defaulting on your payments could have major implications for your credit and financial outlook.

‘There are a number of things that people need to think about and consider before they dive into a large and long term debt like a mortgage,’ warns Alastair McKee, managing director at One 77 Mortgages.

‘Failure to keep up the repayments, for example, means you’ll end up getting repossessed by the bank and potentially end up homeless, so you need to ensure you have the staying power financially to see it through.

‘You also need to ensure that your credit rating is as good as it can be, lenders place a huge amount of emphasis on an applicants credit score these days so missing a payment or being late for other credit commitments you have will end up getting you declined with the best lender and you’ll end up paying more via another lender.’

Alastair also points out a really pertinent issue when it comes to mortgages – the deposit. The requirement of a huge cash deposit is, for loads of people, an insurmountable barrier to getting on the property ladder.

‘Deposits are a huge commitment,’ he says. ‘Five per cent is the minimum these days, which is still a large amount of cash in relation to the average property price and will take time to save-sacrifices need to be made in order to get there.’

In fact, a typical 20% deposit in London is more than £80,000. The kind of money that normal people don’t just have stuffed under their mattresses, and would take years to save on an average salary.

The deposit cost is one of the major things that ensures mortgages remain a kind of debt that is much more common among the middle and upper classes, which may explain why it has come to be seen as aspirational, rather than vilified like other forms of debt.

Linked to this; having significant debt or even a record of payday loans on your credit history, can make it harder to get a mortgage.

Like any financial decision, a mortgage should only be entered into after careful consideration, planning and weighing up the pros and cons.

The benefits of mortgage debt can vary vastly depending on how much you’re borrowing, your personal financial situation and where in the country you’re planning to buy a property.

And, while the benefits of a good mortgage are likely to pay off in the long run, it’s important to remember that any loan comes with risks and responsibilities and a mortgage is no different.

Don’t let the pressure to get on the property ladder stop you from critically weighing up your options. Buying a home would be great, but it isn’t worth getting yourself into financial difficulty over.

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