Mortgage and inflation

[LJM353]

Hello! can someone explain sometime to me please?! We’ve just remortgaged (lucky enough to secure a fixed low interest rate for 5 years - albeit still a higher rate than our last mortgage). I keep hearing the phrase “inflation erodes your mortgage if you have cheap debt.” How does this work?! If there is a property crash surely we lose money even if we have our cheap debt?! (I know it’s hypothetical unless we sell, but we could sell). Even if we have high inflation there still could be a property crash given the increased interest rates. Therefore I am struggling to link how inflation is a good thing for my mortgage debt given the way the interest rates look. My head is scrambled! I’m not an economist. On a seperate note we are quite highly geared with a 70% LTV in London as 30 year olds hence being worried. Also naively if interest rates remain high after our 5 year fixed term our monthly payments will be unbearable. Or is this something people ignore and just worry about at a later date when the 5 year deal is nearing an end?

First line should say *something not sometime

It works if you get a payrise because of the inflation.

If inflation is 10% for 5 years and you get a 10% payrise each year because of this and your current salary is £50k, it will be £80k in 5 years time due to the payrises, but your £200k mortgage will still be £200k, minus whatever you have paid off.

Of course, you're not necessarily going to get inflation matching payrises and how we're defining 'cheap debt' is subjective.

I did read something about people your age never having really experienced price rises, noticeable inflation or 'normal' interest rates so your perception of these things is very different to your parents and grandparents generations who remember what it was like in the 1970s and 1980s.

The other thing to note is that inflation is calculated by the ONS using the increase in cost of a basket of goods and services.

I don't know if house prices or interest rates are part of this, but if they are, they're only a small part of it. People's personal rate of inflation can be very different to the official rate of inflation if they don't spend their money in the same way as the range of items used in the calculation.

Thank you!

Makes sense re debt being cheaper if our salary goes up in line with inflation. I guess the comparison is that if we were renting our salary could go up with inflation but so would rent thus our monthly net position would be the same?

Expect our salary will go up as work in secure sector but as you say i don’t expect it’ll be directly in line with inflation.

I still struggle with understanding how the debt v inflation being a good thing links in with higher current interest rates on mortgage debt v possible property crash but either way we are fixed at an affordable monthly repayment for 5 years so I guess we should focus on that.

Historically we have always overpaid our monthly fixed mortgage repayment but no chance of that for the foreseeable unfortunately which is daunting.

As you say we have only ever experienced low interest rates and no real inflation before given our age so it is new and taking me a while to get my head around.

Thanks again.

A big thing it works for is farmland. If I borrow 500 000 to buy 50 acres over 30 years and inflation is at 10% it makes sense to make interest only payments and at the end of the term pay off that 500 000 which after 30 years of inflation is much easier to pay off
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Thank you