Do you class Mortgages & Student Loans as debt?

Dithering_Dad

Hi Guys,

I've just been reading some interesting posts in the "When will you call yourself debt free?" and had a mini discussion about whether mortgages should be classed as debt.

I was finding it intriguing how different people classify what is and isn't a debt, but didn't want to hijack that thread with further discussion , so thought I'd start a new one. I hope people are interested because unless I busy myself doing this, I'll have to get on with an assessment for a course I'm doing, and posting on MSE is far more interesting!!

My own view is that you're debt free once you don't owe anyone a single penny, including your mortgage provider, that's why I used to include my mortgage debt on my signature when I was paying off my other debt such as credit cards and sofas and such.

In the words of Mrs Merton, "Let's have a lively debate!!"...

medman

To quote Gordon Brown's "Golden rule" only borrow to finance capital spending. If you borrow to finance current spending then that is very risky as you have nothing to show for it.

I think it is healthy to separate secured and unsecured debt. If your asset value exceeds your liabilities then your not in debt. If you hadn't bought a house you would have to finance your accommodation in some way such as rent. By borrowing to purchase an asset that is likely to appreciate in value over the long term, while also providing your home is a good idea. This makes sense in this context and to regard it simply as debt without any qualifying caveat isn't helpful. Conversely if you borrow to finance current spending (food, travel and depreciating assets such as cars, clothes etc) then it is a good idea to regard this as purely debt.

Student loans are of course debt but as the interest rate is so low it is not priority debt and can even be a lower priority to clear than accumulating savings if the interest rates are right, depending on the prevailing rate of inflation.

Just my view, but I think shared by many.

Cheers

MM

Dithering_Dad

Phew thanks for posting MM - I was just about to give up and pull out my coursework. I may yet have to, it's a bit slow on here today. I guess everyone is out enjoying the sun while I'm stuck in worrying about my assessment!

I see your point with the "borrowing to invest", but because we Brits have such a love affair with property, do we have a blinkered approach to it? For instance, you'd never borrow to invest in the stockmarket even though this has (we are told) exceeded the returns from property over the long term.

I also see where you're going with putting debt into context, where there is unsecured & secured debt. I'd always prioritise debt based on risk and interest rates and would repay on this basis.

Where I disagree is the suggestion that if you have (say) 100k worth of mortgage and 100k worth of equity in your house that you are debt free. In this scenario the only way to be debt free is to sell your house and buy one for half the price. If you contacted your mortgage provider and suggested to him that because your debt and equity were equal (and you therefore had no debt), and were not going to make any more mortgage payments, he'd soon call in the bailiffs!

If you had other assets other than your equity that were equal or greater than the value of your mortgage, then I'd agree that you were debt free.

medman

Dithering_Dad wrote: »

Where I disagree is the suggestion that if you have (say) 100k worth of mortgage and 100k worth of equity in your house that you are debt free. In this scenario the only way to be debt free is to sell your house and buy one for half the price. If you contacted your mortgage provider and suggested to him that because your debt and equity were equal (and you therefore had no debt), and were not going to make any more mortgage payments, he'd soon call in the bailiffs!

If you had other assets other than your equity that were equal or greater than the value of your mortgage, then I'd agree that you were debt free.

I keep popping in and out of the sun as my Celtic complexion can't take too much!!

I do understand your point....but....

If you sell your £100k house and repay your loan you're indeed debt free and you replace your mortgage payments with rent (more or less) so now your debt free, paying out about the same each month but now you don't own an asset that may (or may not) appreciate during the long term. Better off? not really. There is a balance to be struck between these positions I think. Buying housing is a very Anglosaxon obsession, and to a great extent, that is what drives the inflation in house prices.

Let me vary your sum a little: Borrow £100K and buy the £100K house and rent it out for £10K pa that's a yield of 10%, less the interest on the loan about 5% leaves you with 5% profit, plus you get to trouser any capital appreciation. That's smart borrowing (provided the housing market doesn't crash)

Nobody is saying that this isn't debt but I think a reasonable summary would be to divide debt into good and bad. Good for capital items that produce yield (or provide a home) and appreciate in value. Bad for living expenses or for buying capital assets that will depreciate in value such as cars. If you accept that premise then it's a matter of what level of risk you are prepared to take with borrowed money. Most people would regard houses as a good long term investment but would shy away from shares. The trouble with shares is they are too easy to buy and sell and you can't use them to live in. Most people buy at the top and sell at the bottom.

Happy to be keeping you from your assignment!!

MM

itsarichmansworld

See my sig I class myself as unsercured debt free but still have a mortgage.

medman

itsarichmansworld wrote: »

See my sig I class myself as unsercured debt free but still have a mortgage.

And a very nice position that is to be in!!

Bad debt nil good debt £55K with accommodation provided :beer:

Dithering_Dad

Boy, I'd love to have a 55k mortgage. Maybe that's why I view my mortgage as a debt because it's quite large and I'm outside my comfort zone with it - even though I own half of the house.

I still have the feeling we're all part of a big con by the financial institutes to think that a mortgage is not a debt and that owing 100k (plus) is quite normal so that we keep plugging away on the treadmill for them.

roswell

My personnal view is debt free is when you get your pay at the end of the month and NONE of it goes to the bank / lenders.

Technicaly Im martgage free in a number of ways firstly the house is worth more than the mortgage and secondly I have a healthy growing savings pot but i would honestly say debt free is when you dont have a payment to a financial institution for anything.

roswell

Dithering_Dad wrote: »

Maybe that's why I view my mortgage as a debt because it's quite large and I'm outside my comfort zone with it

I still have the feeling we're all part of a big con by the financial institutes to think that a mortgage is not a debt and that owing 100k (plus) is quite normal so that we keep plugging away on the treadmill for them.

I think you have hit the nail on the head there, we all have our own comfort zones, in my case I have stopped making any major effort to clear my mortgage as I no longer see it as a threat, As you overpay you will find a point (I did) that you just give up, you decide that what you owe is reasonable and that your not in any major danger (eg a price crash) so you then look at saving / investing.

medman

Ah DD,

that's the other factor: debt can only be good if it's manageable on your income. If you decide to devote a very large proportion of your income to paying for accommodation, then that's not necessarily good debt. The cost of your house (rented or mortgaged) depends on size, location etc if it's too big and in an expensive area so that your income can't service the debt then that's not good.

The choices you have are to cut down in other areas, downsize or increase your income!

Not easy
MM

beanielou

I dont include my mortgage as debt.
If I dent have my mortgage then I would have to rent & most likely pay a similar amount.
Most people have to have a loan for a car or home improvements and thats ok in my book as long as its budgeted for & affordable