What's this about inflation?

jetfighter

For the second time this month someone has just told me that paying off my mortgage more quickly is "stupid" because by the time the term is up, the money I'm using to overpay now will not be worth anywhere near as much as it's worth to me now, due to inflation.

I can't get my head around this. A debt is a debt is a debt, as far as I'm concerned, and I want to get rid of it asap - is this wrong?

Stats-wise, here are our figures:

£45,000 mortgage
6.59% interest rate - 2 year fixed, ending August 2009
unlimited overpayments, and unlimited withdrawals up to the total of our overpayments so far

Not yet officially joined the MFW club because our mortgage is a bit up and down at the moment - we have released funds to fund building work - but when it's stabilised and we're ready to start overpaying again, I'd love to join!

Just curious about this inflation thing. My dad told me it first, and now a colleague has said the same... that overpaying by £1,000 every month now is silly, because in 20 years my £1,000 won't be worth the same as it's worth to me now.

I don't get it. Feeling like a bit of a newbie here! Any advice?

Bargain_Rzl

Wage inflation is what is important here - and it's not what it was. In today's economy, wages are not inflating at a rate that should lead people to expect their mortgage payments to be dwarfed by increased income (as they were two or three decades ago).

I agree that a debt is a debt (except where it's a stooze ) and personally I find the knowledge of several pounds' interest creeping up on me every day is a good incentive to get my DEBT down as soon as possible

biscit

Either the people telling you this are buying into the "real value of inflation is much more than the RPI line" or they're not taking into account that 6.59% interest you'll be saving.

If you keep your contracted payments the same, your £1000 investment will effectively grow at that rate. What's more as that's money you're saving rather than money you're earning, that's 6.59% tax free.

Now for me £1000 invested in my mortgage could make the difference at renewal time between the best rate and the next best rate. So reducing your mortgage as a percentage of your property value could make sense there.

You could also potentially be saving on your life cover at renewal too.

You don't say what term is left after the 2 years, that could make a difference.

jetfighter

Thank you so much everyone for the replies so far... and for not beating me about the head with a stick for being a bit dim on this subject. Things are starting to make sense...

biscit, there are 20 years left on the mortgage. We took it out in 2003. Does that make a difference?

esthomizzy

I'm not sure it helps with the statistics but don't forget that the inflation does whatever it will in the time whatever you choose to do with the money. If you pay your mortgage off faster then the salary inflated or otherwise will be all yours to spend/save/invest once the mortgage debt is gone.

There is probably something to be said for the extreme negative camp who say don't bother overpaying the mortgage so much that you can't live enjoyably because you might die and not benefit at all. But I think there is a useful middle ground. Live well enough that life is still a pleasure but think about what extra options overpaying will bring you in the future. In my case I hope it's buying me extra years of no debt repayments when I will be free to make choices that please me rather than ones that bring in lots of money (possible change of job/lifestyle).

biscit

Not dim, your question was an intelligent one!

Now in principle the term left makes few odds, but looking at things another way.

I'm going to keep the figures rough to illustrate the principle, and not stare too closely at your finances. Roughly speaking a mortgage of £45,000 at 6.49% gives a payment of £340 per month. But around £240 per month of that is interest, you only actually pay £100 off your loan each month. £1000 buys you approximately 10 months worth of capital repayments, right? So if you don't reduce your monthly payments as you are allowed, you could reduce your mortgage term by up to 10 months.

10x£340 = £3400.

Not sure what sort of annual growth that is, but it sounds good to me.

jetfighter

Thank you everyone for the advice.

I'm still not 100% clued up about inflation as it's something that tends to go a bit over my head. I never was that good at maths. :rolleyes: But what you say, biscit, does make a lot of sense. Thank you for taking the time to explain things.

:T Think I will definitely continue with my plan of becoming mortgage-free!

CLAPTON

what you should consider is what else you can do with the money that you are otherwise overpaying.... so if you save it in a saving a/c the issue is whether the net interest received is greater than that paid on the mortgage .. if it is then save it otherwise pay the mortgage. Similarly if you would otherwise invest it.. same consideration.
inflation is nothing to do with it directly

Lokolo

jetfighter wrote: »

Thank you everyone for the advice.

I'm still not 100% clued up about inflation as it's something that tends to go a bit over my head. I never was that good at maths. :rolleyes: But what you say, biscit, does make a lot of sense. Thank you for taking the time to explain things.

:T Think I will definitely continue with my plan of becoming mortgage-free!

Inflation in very simple terms:

A mars bar 10 years ago cost 25p, today it costs 50p, inflation has caused the raise in inflation.

Basically companies make profit, they raise prices because people will still buy the products i.e. mars bar. The company then pass this extra profits onto staff, who then have a larger wage, and can then buy the more expensive mars bar. Its a cycle basically.

The more people that spend, the higher inflation because companies get more profit, raise prices, give staff higher wages.

Get it?

And say, in 100 years, a mars bar will cost £2. So going back to your original point of the thing being worth less in future. If you have £10 today, it can buy you 20 mars bars (50p each), but in 100 years mars bars will cost £2 each, so you can only buy 5.

LindsayO

I think there is some sense to what they are saying.
Suppose after all my basic expenses are covered I have £100 a month to spend.
Suppose also I want not just to buy my house but also other material goods
If I put the money into paying off my house I'll spend less on the house, but the other goods I wanted will cost more than they do today, so the house will cost me less, but the other goods will cost me more and I'll have to wait for them

If I use my £100 a month to buy other goods, I'll have them at the best possible price (assuming inflation and not deflation) and I'll have them right away. Sure I'll end up paying more for my house, but I'll save on the other goods, and I'll have use of the house and the goods for the whole time

I think for this reasoning to really make sense for the savings on the other goods to cancel out the savings on the mortgage interest, you would need to be planning on buying an awful lot of material goods, and inflation would need to be very high.

I guess it also depends on how much of a premium you put on having these material goods now

benbenandme

I'm lost