What's this about inflation?

LindsayO

benbenandme wrote: »

I'm lost

ok let's take me as an example, I have a £105k mortgage, over a 17 year term. If I keep paying the regular mortgage payments I will pay back the £105k I borrowed plus something like £70k interest. If I make overpayments, they go directly towards reducing the capital, so I end up paying interest on less capital, so I end up paying less interest. My interest rate is fixed for the next 10 years, so I don't need to worry about the BoE changing the interest rate to beat inflation.
Suppose I have £500 a month extra cash and I put in into my mortgage, then I can pay off my mortgage in 8 years and pay about £30k less in interest
Suppose my neighbour is in the same situation as me decides instead of paying into my mortgage to buy other things that they want, a nice new flat screen TV, a new music system, each month they spend £500 on some new treat for themselves

At the end of 8 years I'll be mortgage free sitting in an empty house. My neighbour will still be paying their mortgage, but will be surrounded by beautiful things that I want. If I really do want all the things my neighbour has, I can start buying them now, but if inflation is high enough, after 8 years, they may well cost me alot more than they cost my neighbour. If they cost me £30k more then at the end of 17 years we will have spent exaclty the same amount of money, and I'll have done without those lovely material goods for no good reason.

I think this is a fair representation of the thinking that leads people to say people are silly to pay into their mortgage

jetfighter

Thank you Lindsay - your last example has explained things really well and it now makes sense to me (I think). It took a while :rolleyes: but I got there in the end.

So what my argument with these people has been all along is right then? That it's about finding a balance between paying off debt and spending money on the things you want?

We haven't scrimped and saved every last little penny and thrown it at the mortgage; instead, we've bought the things we want (we aren't hugely into material goods, though, so that helps!), had the holidays/trips we want to have, done the home renovations we want to do; and we've still been able to overpay by a decent amount (though obviously not by as much as if we'd gone without treats).

In any single month when we want to have a holiday or do some work on the house, we reduce or miss an overpayment and opt for the treat - so I guess we're going about it the right way? (I hope?) We can still reduce our 19-year term to about 5 years and not have an empty house at the end of it. If we were going to end up with an empty house, I guess you could say we'd reduce our mortgage to 2 or 3 years! (Or maybe that is the best thing to opt for?)

So it's all about balance... right? (Or am I still getting the wrong end of the stick?)

Floxxie

LindsayO wrote: »

At the end of 8 years I'll be mortgage free sitting in an empty house. My neighbour will still be paying their mortgage, but will be surrounded by beautiful things that I want. If I really do want all the things my neighbour has, I can start buying them now, but if inflation is high enough, after 8 years, they may well cost me alot more than they cost my neighbour. If they cost me £30k more then at the end of 17 years we will have spent exaclty the same amount of money, and I'll have done without those lovely material goods for no good reason.

I think this is a fair representation of the thinking that leads people to say people are silly to pay into their mortgage

But you wouldn't be sitting in an empty house - you would have already had furniture etc. in there, and there would be nothing stopping you getting freebies from Freecycle etc. Your neighbour on the other hand, would probably have changed their TV and appliances several times over..in fact you could always ask them for the cast offs! There is also the consideration that in certain sectors, the price of things does come down. I remember we bought a video recorder 8 years ago and it cost us £500. Now, a similar one can be bought for under £50.

But yes, understand your reasoning...

Inflation doesn't bother me (at the moment!). I'm paying down the mortgage because our minimum payment is enormous..the lower I can get it down, the more I can reduce the monthly payment.

We however also do not throw everything at the mortgage and try and keep a balanced approach. I shall certainly be happier when my monthly payment is down to £400 p.m. and not the £800+ it is now.

Floxxie

Jonbvn

I think your dad is thinking about the 70's when we had hyper-inflation (well above 10%). In such circumstances it would probably be best not to overpay your mtg, since the ratio of your mtg payments to your income will shrink very quickly. As an example of this, when I went to university in the 1980's I remember that the rent I was paying for a room in a grotty shared house was significantly more than the mortgage payments my parents were making for a 3-bed semi, which they had bought in the 1970's.

At present we are not even close to hyper inflation (CPI is 3.3%). Therefore, given your mtg rate of 6.59% overpaying is a good idea.

LindsayO

jetfighter wrote: »

Thank you Lindsay - your last example has explained things really well and it now makes sense to me (I think). It took a while :rolleyes: but I got there in the end.

So what my argument with these people has been all along is right then? That it's about finding a balance between paying off debt and spending money on the things you want?

We haven't scrimped and saved every last little penny and thrown it at the mortgage; instead, we've bought the things we want (we aren't hugely into material goods, though, so that helps!), had the holidays/trips we want to have, done the home renovations we want to do; and we've still been able to overpay by a decent amount (though obviously not by as much as if we'd gone without treats).

In any single month when we want to have a holiday or do some work on the house, we reduce or miss an overpayment and opt for the treat - so I guess we're going about it the right way? (I hope?) We can still reduce our 19-year term to about 5 years and not have an empty house at the end of it. If we were going to end up with an empty house, I guess you could say we'd reduce our mortgage to 2 or 3 years! (Or maybe that is the best thing to opt for?)

So it's all about balance... right? (Or am I still getting the wrong end of the stick?)

I think it all depends on your priorities and the exact rates of interest and inflation. If getting certain material goods was very important to you, say you were a pilot and wanted to buy your own aeroplane, and your mortgage rate was fixed and inflation was very high, and you had enough cash to buy the plane, then buying the plane now rather than putting it into your mortgage might save you money.

I think for most people who don't need or want alot of expensive material goods, and are happy to wait, or buy second hand, or do without the latest and greatest, then it makes sense to put it inot the mortgage.

In my case I'm facing the possibility of forced medical retiral and that means a pension that will not cover the mortgage payments, so it's all going into the mortgage, no matter how much I want those other things, unless I really need it for my basic phyical needs or to keep doing my job, then I don't get it

LindsayO

Floxxie wrote: »

But you wouldn't be sitting in an empty house - you would have already had furniture etc. in there, and there would be nothing stopping you getting freebies from Freecycle etc. Your neighbour on the other hand, would probably have changed their TV and appliances several times over..in fact you could always ask them for the cast offs! There is also the consideration that in certain sectors, the price of things does come down. I remember we bought a video recorder 8 years ago and it cost us £500. Now, a similar one can be bought for under £50.

But yes, understand your reasoning...

Inflation doesn't bother me (at the moment!). I'm paying down the mortgage because our minimum payment is enormous..the lower I can get it down, the more I can reduce the monthly payment.

We however also do not throw everything at the mortgage and try and keep a balanced approach. I shall certainly be happier when my monthly payment is down to £400 p.m. and not the £800+ it is now.

Floxxie

I wouldn't necessarily already have furniture, plenty of people buy right out of living in furnished flats, but yes I agree you are much better off making do with something that does the job, than always buying the best and newest, and yes with hi-tech stuff the price does go down, so if you want a digital camera say you are much better off, buying something just a little out of date