How Bad Is Mortgage Debt?

A couple of years ago, an elderly friend of mine, berated me for having a few thousand pound debt on a credit card. (It was debt on a low % balance transfer) He said the modern generation were very bad because they were so keen to borrow money. To some extent he has a point about younger people being keen to take on debt. (There are currently record levels of personal debt in the UK and other countries.) However, I pointed out that he had been quite happy to take on a mortgage debt of £100,000. I asked him why his mortgage debt is fine, but, other types of debt are not? It was an interesting discussion. These are some of the issues about mortgage debt.

Low Interest Rates.

Mortgage debt is generally the cheapest way to borrow. Banks offer rates relatively close to base rates because it is seen as secured debt. Unsecured lending on credit cards and personal loans can cost upto 2 or 3 times the interest rate. However, in an era of falling house prices, there is a danger people could be left with a situation of negative equity; their secured borrowing becomes unsecured.

Spread out Over Many Years

A mortgage can be spread out over a time period of 20-50 years. This is both a benefit and a problem. The benefit is that it enables us to borrow large sums and keep the repayments manageable. The drawback is the longer we borrow for, the more we have to pay in interest rates. The total cost of mortgage payment can be 2-3 times greater than the initial loan. See: Should I pay off my mortgage early?

Mortgage is an Investment.

When we take out a personal loan to go on holiday, there is no investment. We get the money, spend it and then have to pay it back. With a mortgage we are saving on the alternative which is renting a house. Mortgage payments may seem like a big burden, but, so is the cost of renting. It is estimated by Abbey National that over a 25 year period, buying is £10,000 cheaper than renting. Even bigger benefits occur after this period ends. see: To buy or rent which is better?

Mortgage can be used to consolidate other loans.

One advantage of taking out a mortgage is that later we can use it to consolidate other loans such as credit card debts. This helps us to reduce our interest costs. However, this may not be possible if we experience falling house prices and negative equity. Also, we may take advantage of our mortgage to borrow too much, leaving us with more debt than we can deal with.