If you are paying a fixed rate on a mortgage, is inflation then a good thing?
In: Economics
I teach AP Econ to non-native speakers, so if I can’t do this ELI5, I should probably be fired.
Yes, inflation is good for your mortgage. Imagine your monthly payment is $1,000 and your monthly salary is $5,000. That means, every month, you’re paying 20% of your annual salary toward your mortgage.
But over time, the value of each dollar is cut by half and both prices and salaries double as a result of inflation (e.g. your monthly salary goes from $5,000 to $10,000, but still buys the same amount of stuff as before because everything got twice as expensive). However, the “price” of your mortgage hasn’t changed – it’s still $1,000/month. You used to pay 20% of your salary toward your mortgage, and you’re now only paying 10%, so your mortgage has effectively gotten cheaper.
This is a gross simplification that doesn’t consider all the other effects of inflation, but purely in terms of your fixed rate mortgage, yes, inflation is good. In general, we say that when loans are fixed rate, borrowers benefit from unexpected inflation and lenders are harmed. This is why lenders like adjustable rate mortgages – it mostly eliminates their risk due to possible future inflation.
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