The Great Debt Debate
One of the top three questions I'm asked as a wealth coach is "Mike, should I pay of ALL my debts including the mortgage?"
It might seem like a silly question on the surface of it however there are many actual and so called "wealth gurus" and they all seem to have conflicting opinions on this subject.
Many also tout the idea of good debt versus bad debt which I am sure just confused peple even more : on the one hand you talk about getting rid fo debt and then on the other you talk about it being ok to have "good debt"!
I thought in this opening post I would put this top question to bed for you.
Types of Debt
The first thing to understand is that there are many different types of debt, and they need to be treated differently. I'm going to take for granted for the time being that you know how to prioritise your debts!
Revolving , Unsecured Lending
This means Store Cards, Credit cards, overdrafts and other small loans. These should be paid off as fast as possible and paid off completely.
Secured Personal Lending
For this I'm really thinking of a personal loan for a capital purchase say a car or a boat where the loan is secured against the item you are purchasing. This means that if you default they re posses your car/boat whatever. Again these debts should be paid off asap and never incurred again. Save before you spend!
Mortgage
This is a loan secured agains the property, it should be last on your list and is a very special case. Before I explain why I want to answer a couple of questions that relate to mortgages and property;
1) "Mike, should I get a consolidation loan and roll all my credit card debts and so on into one loan with lower monthly payments?"
- the answer in this case is almost always NO. It may seem tempting to have one lower payment, heaven knows that loan providers spend a fortune on clever ads to promote this service. However your credit cards debts and store cards are "unsecured" that means if you fall behind in payments there's really not much the lender can do. Consolidation loans on the other hand are regarded as "risky" by the lender and are almost always secured on your property. That means if your circumstances change, if you can't make the payments the lender can literally sell your home out from under you. On top of that your total repayments will end up costing you MUCH more in the long run.
2) Should I roll my other debts into my mortgage to benefit from the lower rate?
- only and I do mean ONLY if you can resist spending on plastic. Rolling debts into yor mortgage for a lower rate is good but you need to keep the mortgage payment period the same i.e. extend the amount of your mortgage but not the term. At the same time I suggest that you get rid of all but one credit card (if you really must have one).
OK so back to the big one - Should you pay off your mortgage? The simple answer is that it depends where you live. If you live in a nation which allows you to write off your mortgage interest against your income tax bill then I suggest that you don't need to be in a rush however neither should you work to increase it!
If you live somewhere like the UK where there are no tax benefits then I have to say that you must pay off your mortgage as soon as humanly possible. You need to reverse the situation from paying 5 - 6% on £150k to earning 5-6% on £150K.
OK that's it for now. Next time - property investment, should I get into property and whats the best way to make money from it.
All the best
Mike
One of the top three questions I'm asked as a wealth coach is "Mike, should I pay of ALL my debts including the mortgage?"
It might seem like a silly question on the surface of it however there are many actual and so called "wealth gurus" and they all seem to have conflicting opinions on this subject.
Many also tout the idea of good debt versus bad debt which I am sure just confused peple even more : on the one hand you talk about getting rid fo debt and then on the other you talk about it being ok to have "good debt"!
I thought in this opening post I would put this top question to bed for you.
Types of Debt
The first thing to understand is that there are many different types of debt, and they need to be treated differently. I'm going to take for granted for the time being that you know how to prioritise your debts!
Revolving , Unsecured Lending
This means Store Cards, Credit cards, overdrafts and other small loans. These should be paid off as fast as possible and paid off completely.
Secured Personal Lending
For this I'm really thinking of a personal loan for a capital purchase say a car or a boat where the loan is secured against the item you are purchasing. This means that if you default they re posses your car/boat whatever. Again these debts should be paid off asap and never incurred again. Save before you spend!
Mortgage
This is a loan secured agains the property, it should be last on your list and is a very special case. Before I explain why I want to answer a couple of questions that relate to mortgages and property;
1) "Mike, should I get a consolidation loan and roll all my credit card debts and so on into one loan with lower monthly payments?"
- the answer in this case is almost always NO. It may seem tempting to have one lower payment, heaven knows that loan providers spend a fortune on clever ads to promote this service. However your credit cards debts and store cards are "unsecured" that means if you fall behind in payments there's really not much the lender can do. Consolidation loans on the other hand are regarded as "risky" by the lender and are almost always secured on your property. That means if your circumstances change, if you can't make the payments the lender can literally sell your home out from under you. On top of that your total repayments will end up costing you MUCH more in the long run.
2) Should I roll my other debts into my mortgage to benefit from the lower rate?
- only and I do mean ONLY if you can resist spending on plastic. Rolling debts into yor mortgage for a lower rate is good but you need to keep the mortgage payment period the same i.e. extend the amount of your mortgage but not the term. At the same time I suggest that you get rid of all but one credit card (if you really must have one).
OK so back to the big one - Should you pay off your mortgage? The simple answer is that it depends where you live. If you live in a nation which allows you to write off your mortgage interest against your income tax bill then I suggest that you don't need to be in a rush however neither should you work to increase it!
If you live somewhere like the UK where there are no tax benefits then I have to say that you must pay off your mortgage as soon as humanly possible. You need to reverse the situation from paying 5 - 6% on £150k to earning 5-6% on £150K.
OK that's it for now. Next time - property investment, should I get into property and whats the best way to make money from it.
All the best
Mike
posted by Mike | 9:21 AM
|
0 comments
