Using inflation to eliminate your mortgage

johnweir123

Hi all.  I'm sure this has been done to death on here but I was wondering if anybody could document an example of the simple economics of eliminating a mortgage debt using inflation. 

I'm going to provide some example figures and would really appreciate a reply which can complete the picture.  I'm not great with maths so this is probably a basic one for someone who is. 

The basic principle here is buy a house with a mortgage.  The price of the house rises over a period of - for instance, lets say 20 years - in the meantime you will have been making monthly payments to reduce the size of the debt.   

At some point you can you can perform a bit of a switcharoo where you sell your house at the current much inflated value, buy a new house which is a bit cheaper and in so doing wipe out your mortgage.  It works because the difference between the value of your house and the new home you move to is insignificant in terms of specification but the inflated values relative to how things were 20 years previously are enough to wipe out what is left of the mortgage. 

So example values, keeping them nice round numbers for ease: 

Cost of house in 2020 = £350,000
Deposit / equity = £80,000
Mortgage = £270,000 in 2020
Interest rate = 2% for the whole 20 years - may or may not be realistic/ relevant? 
Mortgage length = 40 years

Alternatively, if I'm over-complicating this I'd like to hear peoples opinions on similar sorts of antics. 

Soot2006

I mean, broadly, this is what many people aim to do, as long as they don't upgrade property/take on additional borrowing or debt, and downsize to a cheaper property at the right time.Provided there is no house price slump and also provided the original property wasn't bought during a house price peak, then many people can live/retire mortgage-free. 

Of course, many others cannot as they don't have sufficient funds or need additional borrowing at some point, lose their job, etc ... Life does weird things and you never know what will happen next. As a "plan in the background" it's fine. But it doesn't change the advantages of mortgage overpayments and sensible pension planning!

2% is unrealistic for the next 20 year speculation but the rest is pretty much how the housing market works.

johnweir123

appreciate all that. The interest rate may not matter in this calculation simply because the size of the repayments being made will be in line with affordability and could be anything.  I did specify a term of 40 years but if you're not completing the term that does all kinds of weird things to the size of the debt due to the front loaded interest.  Maybe you could be making overpayments as well. 

As you say, cannot predict the future.  But that does not mean you shouldn't make plans. 

So I'm still interested in the back-of-fag-packet calculation of how you would manage a deal like this? 

Hoenir

A larger property will cost more to maintain, incur higher council tax. have higher energy costs, incur more in interest costs etc etc. Not just inflation that needs to be considered. Buy a smaller property at the outset and the debt could be wiped out years ahead. 

johnweir123

Not really the purpose of the topic.  You could avoid buying a house completely and just rent... that would also mean you had no mortgage? 

LadyWithAPlan

 I think you are also forgetting the emotional step of moving backwards in house. 

I get people downsize when they are empty nesters - but many don’t as they don’t want to leave the memories or declutter ! 

Also the bigger you buy the more the costs of maintenance and interest 

some musing on your calculations 

also there will be a price increase on the lower cost house you do buy at stage 2 - so you need to factor that in using same house price rise 

Plus surely you need to count for house maintenance costs - people say to use a 1-4% of the value of the house per annum as house is worth less or nothing if not maintained 

so let’s say interest rates at 4.5% average (still wildly low historically) 
plus 2% annual maintenance Costs 
so 6.5% 

base level  inflation rate was over 20 years in uk in Jan 24 4% - it had come down a smidge since - though inflation was 13.8% in 2022

However house prices  over 20years  - is 
said to have increased by 207% up to 2022 but that is before COL and also people are now having issues with getting mortgages as salaries stagnant, interest rates are 4% not 1.5% so I would expect a flat house price for 2 years 
what the expected house price increase over the next 20-40 years is v hard to judge - but it is probably 80% at least 

either way you need to live somewhere and  lots of people argue you can use cash for investments in S&S etc and earn more than house prices over the next 20 years -especially when you take maintenance etc into acct 
with tax breaks as well on pensions especially if you are higher earner,  40-45% then the maths get muddy 

 I certainly am in a situation where I rent and between the interest on my large deposit and a lower rent for a while I was making money on my rental situation 
My rent has now jumped up but still after my deposit earnings are taken into consideration my actual rent is less than half of what the monthly interest portion alone would be on a mortgage 
I also sleep well at night. 

I am still planning to buy as I want to have somewhere to live and pay off asap for the next step of my investment plan but the maths of house buying that it is always a blessing is not true especially when life happens 

Veteransaver

But on average you'd expect interest rates to generally be higher than inflation rate. So the cost of the debt will always be more than the amount inflation is eroding the debt.

Hoenir

johnweir123 said:

Not really the purpose of the topic.  You could avoid buying a house completely and just rent... that would also mean you had no mortgage? 

If that's your view. Makes the whole topic/conversation utterly pointless. This is after all a money saving site. 

South_coast

I was thinking it was a pretty pointless conversation anyway 🤣! Yes, inflation will erode the value of the debt over time, but the price of the new home will rise at the same rate as the price of the existing one, so who's to say that "cashing in" to buy the new home will get you what you actually want? 

It's all crystal ball stuff, you just need to make the best decision for you at the time and forget about what may or may not happen in the future

johnweir123

I would say property is going to rocket in price again in 2025.  It used to grow in a stupid way before the interest rate rises put a pause on house price rises.  What is going to happen when they roll back on the interest rates as general inflation has been killed off? 

I guess upon reflection the answer to my own question would be the same old 'buy low, sell high' logic that allows you to take a cut in any situation and you would use that to repay the mortgage.  The interesting bit I thought was how the value of the house increases while the value of the loan does not and thought there might be something in that dynamic which could be beneficial to someone who would move once for a debt free retirement?