Does Mortgage Count as Debt: And Six Other Vital Questions

When the moment comes to consider getting the biggest loan of your life, you’ll likely find your mind is filled with questions. Some of those questions occur to most, if not all, those who think about getting a home loan to help them buy a property.

We’ve answered seven of the most important questions here. You may find some of the answers you’ve been looking for are below.

The short answer is yes. However, there is such a thing as a good debt and a bad debt. Few people could afford to buy a home without a loan to help them. This is common knowledge therefore a home loan is viewed as a good debt.

It is taken out to assist you in buying and owning your own property. The property itself is also viewed as an asset that will go up in value over time. Therefore, your loan is much like an investment that will hopefully provide dividends for you in the future. In contrast, bad debt might be purchasing a brand-new car when you cannot afford to. Cars go down in value, so a new one would not represent a good use of funds.

Most people are aware their credit score and history will be checked when they apply for a loan to help them buy a property. However, what happens to your credit score once you have that loan? Your credit score is based on numerous factors, one of which is your ability to pay what you owe on time.

So, if you meet your regular monthly repayments for your property loan without lateness, your credit score will not be affected. Over time, it will demonstrate you are responsible in repaying what you owe. Since a home advance is the biggest loan you will ever take out, it makes sense that repaying it in a timely fashion and never missing a payment will be a positive thing.

If you default on the loan, this will show on your credit report and not in a good way. Many people buying cheaper properties are now out of the stamp duty net altogether. Only properties costing £125,001 or more now attract the stamp duty charge. However, that still covers most properties in the UK. Moreover, properties that do attract the charge may incur a greater charge now than they did in the past.

At present, a property worth £300,000 would attract a stamp duty charge of 5%. That adds up to £15,000 to be paid. Moving can be a costly business anyway, without finding another £15k to pay on top of moving costs. If you are switching loans or looking for a lender to help you buy your property, finding that extra cash can be impossible. It is possible to take out a home loan big enough to cover the stamp duty as well. However, be aware this means the length of the loan will extend to the same time the loan runs for.

This can add thousands onto the amount you will pay. Always do your figures and work out if there is a cheaper way to go than this. Adding the stamp duty to your loan may be possible, but it can also be the most expensive way to go about it. Be aware too that stamp duty charges are always subject to change, much as interest rates are. Keep abreast of the latest news when you are ready to buy, so you know what you are faced with.

Yes. Any credit accounts you hold, including that of a home loan, will show up on your credit report. However, if you meet your regular repayments and don’t fall behind, this should have a positive effect. Most people think of their property purchase in two sections: the deposit and the remaining amount loaned by the bank or building society to complete the purchase. Those two elements should be viewed as separate entities.

Let’s suppose you want to buy a property worth £200,000. If you have enough cash to provide a 10% deposit, i.e. £20,000, you will then seek a home advance for the remaining 90%, or £180,000. Your deposit is taken as part-payment towards the property you have bought, with the loan providing the rest. The lender pays that amount to meet the cost of the property, while you agree to pay that amount back, plus interest, over an agreed term.

Therefore, the mortgage amount is not inclusive of the deposit. The loan-to-value rate (LTV) is expressed as a percentage of the cost of the property, amounting to the loan amount you will take out. In this case, it would be 90% LTV for £180,000. It can do. As we mentioned above, if you are often late with your monthly payments or you default on the loan, this will negatively impact your credit score.

Meanwhile, if you never miss a home loan payment over the life of your loan, this helps demonstrate you can be relied upon to meet your financial commitments over time. It is a powerful thing to remember. Insurance is something most adults are more than familiar with. Life insurance is not necessary for everyone to have, although it depends heavily on your personal situation.

When someone buys a property with the help of a loan, they will often take out mortgage life insurance. This is designed to cover the cost of the loan in case something should happen to the homeowner. This would pay off the remaining loan instead of passing on potential financial problems to the loved ones left behind.

This form of insurance usually works over a decreasing term. As the value of the loan decreases, so does the payout that would be received. However, this may not suit everyone. For instance, if you have a family, a level term insurance policy would likely be a better option. It is guaranteed to pay out a set amount on your death, meaning the loan would be paid off and there would still be cash left over to support your dependents.

Always take financial advice prior to buying this type of insurance. It is far easier to choose the best policy for your needs if you do this.

Published on 20 July 2020

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