Debt I understand, inflation I don't.... 19 June 2011 at 5:15PM in Mortgage-free wannabe 2 replies 556 views

sgl1965

I have around £3.500 left to pay off my mortgage. I have the money in an ISA and could pay it off tomorrow but as I'm only paying .69 per cent on my mortgage interest and earning 3 per cent in the ISA there is no point. This much I understand however inflation is currently running at 4.5 per cent so where does that leave me? Inflation has a negative effect on savings so although I might be earning more on my savings than paying on my debt does inflation negate this effect?

kingster2069

Your right that you savings are currently failing to keep up with inflation and therefore are falling in value in real terms. However your mortgage debt is all being reduced in real terms at the same speed. Therefore current to maximise your income you should only pay your mortgage off when your savings fails below you current mortgage interest rate.
This is slightly complicated if you are taking the money from ISA savings as the benefit of these savings is compounded as you can't get back this tax free wrapper once withdrawing funds.
Hope this helps a little. Sounds like your doing great now.:T

Sepa74

Yep, it's a pain. Real interest rates are VERY negative at the moment.