Not necessarily, if you own a home AND your pay slowly goes up to compensate (both of these unfortunately aren’t happening for a lot of people), relative to your income your mortgage goes down.
Or in more generic terms, inflation is good if you borrow money.
Your maths is not right. Inflation, in absolute terms, is a larger benefit to people with higher interest rates.
Let’s consider the scenario where inflation is 10% for simplicity, and two borrowers who each borrow $100, but Borrower A at 5% annual simple interest and Borrower B at 25% annual simple interest. Both borrowers borrow the money at the beginning of Year 0.
Borrower A owes $105 in Year 1 dollars at the beginning of Year 1. This is equivalent to $95.45 in Year 0 dollars.
Borrower B owes $125 in Year 1 dollars at the beginning of Year 1. This is equivalent to $113.64 in Year 0 dollars.
Compared to a 0% inflation rate, Borrower A saved 9.55 Year 0 dollars and Borrower B saved 11.36 Year 0 dollars. Borrower B saved 1.81 more Year 0 dollars than Borrower B due to inflation (but paid 17.55 Year 0 dollars more overall because of interest).
Actually its the inverse. Borrower A is borrowing the equivalent of $105 and borrower B is borrowing the equivalent of $125 and after 5 years the amount they borrowed is equivalent to $160.
Let’s put this into more real terms. Lets say 30 years ago borrower C got a $100k mortgage at a 6% interest rate. Ignoring everything else that often gets lumped into “the house payment” (insurance, property taxes, HOA/condo association fees, closing fees, etc.) their monthly mortgage payment would be $599.55 for the entire lifetime of that mortgage. That $100k in 1995 dollars that was borrowed would be about $210k when adjusted for inflation. Those 360 payments would also conveniently equal out to roughly $215k meaning they effectively were loaned the money for free over the timescale, and that loan payment of $600 in 1995 is still a loan payment of $600 in 2025 despite the fact that that $600 in 1995 dollars is equivalent to about $1200 today.
Basically with inflation, property ownership ensures a roughly decreasing cost of living over a lifetime and property has a tendency to gain value faster than a dollar does, so ultimately being able to get a mortgage creates wealth for the individual by stabilizing costs that would otherwise grow indefinitely and they gain an asset that generally increases in value.
I’m a bit confused by what you’re trying to say here. It seems non sequitur if you are trying to say “borrowers of higher interest rate benefit less from inflation”.
I wasn’t the one who said that part. I just wanted to correct the simplified math with some real world numbers that put into perspective how much wealth just being able to get a mortgage sets one up for
I mean it more like if you would have borred 100K for a house in the 70s that was a lot of money, if you still live in that house you probably paid it back, but even if you didn’t 100K today isn’t that much money anymore
You are better off regardless of how much your interest rate is, as long as it is fixed. If your mortgage payments are fixed, but your pay increases with inflation, your real monthly mortgage payment goes down over time.
Eg, if your mortgage is $1000/mo, but at the end of this year a cheeseburger costs $1000, then your mortgage payment is the same cost as a cheeseburger. Doesn’t matter if the interest rate you got originally was 1% or 99%.
What does that mean? Where I live you borrow a certain amount of money and you pay it back plus interest (in my case 3.5%), and that percentage is fixed for 20 years. In 20 years I expect to have paid most of that entire amount back and my house should be mortgage free
Yeah. He borrowed money for a house at 1.5%. Then inflation hit almost 10 during covid and our salary didn’t fully cover this but was raised way more than 1.5%. Money lost value much faster than his debt increased, so the banks effectively lose money on him while his paycheck grows faster than his debt increases.
Biggest reason why I started paying an extra 1k for housing per month… In 5 years, my crappy “luxury” apartment will cost more per month than my house. In 10 years, people will think it’s insane how cheap my house is per month.
Or the country could collapse and my property will be worthless, but at that point I got bigger problems.
What do you mean with “inflation was added to your mortgage rate”? The prices of houses do go up but this is mostly a problem for first time buyers, after that your current house has gone up in price too, so that helps with the next house. But if you buy a house and don’t move your mortgage is fixed for 20 or 30 years (unless you go without a fixed rate).
So your monthly payment will stay the same, while hopefully your salary goes up.
As in, the rate of inflation was added to the mortgage rate you were offered. This is because tax incidence falls on the less elastic side of each trade, and credit supply is much more elastic than housing demand.
Not necessarily, if you own a home AND your pay slowly goes up to compensate (both of these unfortunately aren’t happening for a lot of people), relative to your income your mortgage goes down.
Or in more generic terms, inflation is good if you borrow money.
at below the rate of inflation
Inflation going to 2% to 6% when you’ve got a credit card with a 30% APY is of very marginal benefit.
Your maths is not right. Inflation, in absolute terms, is a larger benefit to people with higher interest rates.
Let’s consider the scenario where inflation is 10% for simplicity, and two borrowers who each borrow $100, but Borrower A at 5% annual simple interest and Borrower B at 25% annual simple interest. Both borrowers borrow the money at the beginning of Year 0.
Borrower A owes $105 in Year 1 dollars at the beginning of Year 1. This is equivalent to $95.45 in Year 0 dollars.
Borrower B owes $125 in Year 1 dollars at the beginning of Year 1. This is equivalent to $113.64 in Year 0 dollars.
Compared to a 0% inflation rate, Borrower A saved 9.55 Year 0 dollars and Borrower B saved 11.36 Year 0 dollars. Borrower B saved 1.81 more Year 0 dollars than Borrower B due to inflation (but paid 17.55 Year 0 dollars more overall because of interest).
Actually its the inverse. Borrower A is borrowing the equivalent of $105 and borrower B is borrowing the equivalent of $125 and after 5 years the amount they borrowed is equivalent to $160.
Let’s put this into more real terms. Lets say 30 years ago borrower C got a $100k mortgage at a 6% interest rate. Ignoring everything else that often gets lumped into “the house payment” (insurance, property taxes, HOA/condo association fees, closing fees, etc.) their monthly mortgage payment would be $599.55 for the entire lifetime of that mortgage. That $100k in 1995 dollars that was borrowed would be about $210k when adjusted for inflation. Those 360 payments would also conveniently equal out to roughly $215k meaning they effectively were loaned the money for free over the timescale, and that loan payment of $600 in 1995 is still a loan payment of $600 in 2025 despite the fact that that $600 in 1995 dollars is equivalent to about $1200 today.
Basically with inflation, property ownership ensures a roughly decreasing cost of living over a lifetime and property has a tendency to gain value faster than a dollar does, so ultimately being able to get a mortgage creates wealth for the individual by stabilizing costs that would otherwise grow indefinitely and they gain an asset that generally increases in value.
I’m a bit confused by what you’re trying to say here. It seems non sequitur if you are trying to say “borrowers of higher interest rate benefit less from inflation”.
I wasn’t the one who said that part. I just wanted to correct the simplified math with some real world numbers that put into perspective how much wealth just being able to get a mortgage sets one up for
So what did you mean when you began your comment with “actually it’s the inverse”? Inverse of what?
I mean it more like if you would have borred 100K for a house in the 70s that was a lot of money, if you still live in that house you probably paid it back, but even if you didn’t 100K today isn’t that much money anymore
If your interest is less than inflation.
Like my colleague who bought a house for about 1.5% before inflation nearly went to 10. Man.
Inflation reduces the real buying power of the money used to repay the loan by the inflation rate each year, regardless of your loan interest.
In absolute terms, inflation is better the higher your interest rate is, because the number of dollars it saves you goes up.
You are better off regardless of how much your interest rate is, as long as it is fixed. If your mortgage payments are fixed, but your pay increases with inflation, your real monthly mortgage payment goes down over time.
Eg, if your mortgage is $1000/mo, but at the end of this year a cheeseburger costs $1000, then your mortgage payment is the same cost as a cheeseburger. Doesn’t matter if the interest rate you got originally was 1% or 99%.
What does that mean? Where I live you borrow a certain amount of money and you pay it back plus interest (in my case 3.5%), and that percentage is fixed for 20 years. In 20 years I expect to have paid most of that entire amount back and my house should be mortgage free
Yeah. He borrowed money for a house at 1.5%. Then inflation hit almost 10 during covid and our salary didn’t fully cover this but was raised way more than 1.5%. Money lost value much faster than his debt increased, so the banks effectively lose money on him while his paycheck grows faster than his debt increases.
Biggest reason why I started paying an extra 1k for housing per month… In 5 years, my crappy “luxury” apartment will cost more per month than my house. In 10 years, people will think it’s insane how cheap my house is per month.
Or the country could collapse and my property will be worthless, but at that point I got bigger problems.
Inflation was added to your mortgage rate. And now that everyone saves with real estate instead of saving money, the cost of real estate is very high.
So while your payments do go down over time, your hours worked to either rent or own have gone up.
What do you mean with “inflation was added to your mortgage rate”? The prices of houses do go up but this is mostly a problem for first time buyers, after that your current house has gone up in price too, so that helps with the next house. But if you buy a house and don’t move your mortgage is fixed for 20 or 30 years (unless you go without a fixed rate). So your monthly payment will stay the same, while hopefully your salary goes up.
As in, the rate of inflation was added to the mortgage rate you were offered. This is because tax incidence falls on the less elastic side of each trade, and credit supply is much more elastic than housing demand.