Money: A debt you don't want

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The Independent Online
Quit whining about your mortgage. It's time to move on. If you are upset because your lender won't pass on last week's 0.25 per cent rate cut, try to be grateful that mortgages are already extremely cheap.

Consider instead a much more important subject: how sustained low inflation rates affect your mortgage. A new report by house price guru John Wriglesworth shows that low inflation in recent years (which is set to continue) has overturned all our assumptions about how we pay off our home loans.

Even 10 years ago, he says: "A mortgage was in many ways the best debt to have: not only would its financial impact shrink with every year but with house prices rising faster than inflation, the asset you originally bought got more valuable."

But permanent low inflation means the value of your debt remains almost constant. Even with rising house prices, many people would be better off aiming for the quickest possible discharge.

Paying off a loan in less than 25 years makes sense for social as well as financial reasons. Last week the Office for National Statistics said that only 65 per cent of people in their fifties - of both sexes - are in work. If you are in your twenties or thirties now, you may not work much past 50. Because people are now buying their first homes relatively late, this can have an impact. You should consider a 20-year rather than 25-year repayment term.

And I do mean repayment term. The Wriglesworth report shows the staggering extra cost of an interest-only loan. With these deals you are not touching the original debt for 25 years and simply pay interest while putting cash into an investment designed to pay off the mortgage capital at the end. The usual way to do this is via an endowment policy (a 25-year savings plan).

If interest rates remain at current low levels, a borrower who takes out a 25-year pounds 120,000 mortgage at 6.8 per cent would pay pounds 129,864 in interest on a repayment deal (remember, the debt is always reducing, meaning you pay less interest on it). Meanwhile an interest-only loan costs pounds 204,000. Leaving the mortgage debt untouched is an expensive business.

I should mention that this report was commissioned by Virgin Direct's One account, which allows you to pay off the loan as quickly as you wish. The results are (as you might expect) heartening for Virgin and other "flexible" lenders. But this doesn't detract from the fact that it makes no sense to leave your mortgage debt intact. Most lenders accept one-off lump sum repayments or allow you to "overpay" your mortgage each month. It's worth a phone call.

n i.berwick@independent.co.uk

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