The effect of inflation on a mortgage?

[Deleted User]

If you have a mortgage whilst there's 10% inflation per annum will the debt value decrease in real terms by 10% so that a £100,000 mortgage debt in real terms would be down to £90,000 after one year of 10% inflation? Therefore is getting a mortgage during periods of inflation beneficial as a way to hedge against inflation?

Grumpy_chap

congenialclerk said:

If you have a mortgage whilst there's 10% inflation per annum will the debt value decrease in real terms by 10% so that a £100,000 mortgage debt in real terms would be down to £90,000 after one year of 10% inflation? Therefore is getting a mortgage during periods of inflation beneficial as a way to hedge against inflation?

Inflation does devalue the debt as you suggest.  It is one technique that Governments use.

However, what normally happens is that consumer interest rates are higher than inflation so the cost of devaluing the debt by 10% is greater than 10% in interest paid.

Obviously, right now, interest rates remain much lower than inflation.  One or the other, therefore, has to change.

If you simply take additional borrowing to have cash in the bank, the debt has devalued but so has the cash in the bank.

Grumpy_chap

Why has the OP started two virtually identical threads?
https://forums.moneysavingexpert.com/discussion/6365657/how-does-inflation-generally-relate-to-uk-house-prices#latest

TonyTeacake

Therefore is getting a mortgage during periods of inflation beneficial as a way to hedge against inflation?

In theory, this sounds great if house prices keep going up and you are not on a ARM. Also your wages would need to go up to keep in line with inflation, which is not happening for most of us. Looking at the current market and how the economy is heading I would say no. For example if you buy a property for £300,000, in 2-3 years it could be worth £240,000. 

5LeafClover

I have a related question to this:

Inflation is 10% and mortgage fixed rate is 1%. The debt is getting cheaper in real terms. Mortgage t&c allow me to over pay by up to 25%.

Am I better off to over pay, or keep debt high for maximum erosion of its true value?

My alternatives to overpaying would likely be increasing pension contributions or more into stocks and shares ISA

sevenhills

5LeafClover said:

I have a related question to this:

Inflation is 10% and mortgage fixed rate is 1%. The debt is getting cheaper in real terms. Mortgage t&c allow me to over pay by up to 25%.

Am I better off to over pay, or keep debt high for maximum erosion of its true value?

The debt would be getting cheaper by the % increase in your wages.
RPI inflation is 13.4% food inflation is around 16% but how much are house prices increasing by?

Sarah1Mitty2

TonyTeacake said:

Therefore is getting a mortgage during periods of inflation beneficial as a way to hedge against inflation?

In theory, this sounds great if house prices keep going up and you are not on a ARM. Also your wages would need to go up to keep in line with inflation, which is not happening for most of us. Looking at the current market and how the economy is heading I would say no. For example if you buy a property for £300,000, in 2-3 years it could be worth £240,000. 

The best thing to do is wait until higher rates have reduced the value of what you want to buy, as you say, then take out the mortgage, the less debt you start off with the better off you will be longer term.

Strummer22

5LeafClover said:

I have a related question to this:

Inflation is 10% and mortgage fixed rate is 1%. The debt is getting cheaper in real terms. Mortgage t&c allow me to over pay by up to 25%.

Am I better off to over pay, or keep debt high for maximum erosion of its true value?

My alternatives to overpaying would likely be increasing pension contributions or more into stocks and shares ISA

You put your money wherever you are going to get the best return. If you overpay your mortgage you'll only gain 1% per annum on that investment (the interest rate on the mortgage).

If, instead of overpaying the mortgage, you put that money into a saving account at 2% interest, your net position will be better by the extra 1% interest received on your savings.

Or you could put the money in an investment ISA for potential 5%+ returns, if you can accept the risk that the value might go down.

You would then be free to repay a chunk of your mortgage debt with the savings/investments you've built up when you remortgage - but not during a fixed rate term, if that would incur early repayment charges.