If you are paying a fixed rate on a mortgage, is inflation then a good thing?
In: Economics
Yes, assuming the inflation leads to a steady increase in your wage and assuming you’re locked into a mortgage with term. Generally, the way the system deals with inflation is to increase borrowing rates. So if you’re not locked into a lower rate then your borrowing costs will rise as fast or maybe faster then your wages.
The flip side is that, as the value of money decreases, the amount of money real property can command also increases. AKA, the worth of your home will rise faster.
Inflation is good for all debts but bad for savers. Likewise deflation is bad for all debts but good for savers.
If it takes 500 candy bars to buy a house today and 1000 candy bars to buy a house in ten years you still only owe 500 candy bars total if you buy today meaning you could spend those other 500 candy bars on toys. Since you are paying a fixed amount on the mortgage it is a good thing for the mortgage. What a lot of people are running into is that taxes are based upon how many candy bars it’s worth that year so that math is done off of the 1000 candy bar value even if you only have 100 candy bars left to pay on the house. The house insurance is also based upon how many candy bars they have to give you if the home is destroyed so that cost goes up as well.
500 candy bars is still a lot of candy bars and not everyone can afford a house on their allowance.
In my experience no because at some point you’re going to have to renew the mortgage for another term and it will be more expensive.
The point everyone else is missing is that inflation is good for debt holders in a macro sense ie on average and the only reason inflation is “good” for debt holders is because inflation includes the price of labor ie wages. But if your personally wages never go up as part of the inflation then there’s no benefit to you as a debt holder.
If you look at the mortgage alone, yes. If you consider that inflation increased the value of your home, no. If you buy a house for $500k, and inflation caused it to go to $1M, it looks like you made a $500k profit. Except that $1M cant buy you anything better than what you had.
And congratulations. If you sell the house, for that one year, you are now in the top 1% with an income above 400K. You will be taxed like a rich person in the highest bracket for the brief moment that you are considered rich by the IRS. After a 50% tax on your profits, you will have $750k left over with which you cant afford to rebuy your same house.
Inflation is a hidden tax. If you think far enough, you will realize the cons usually outweigh the benefits.
Inflation is good for all the economy. If there is no inflation then people can just put their money under their beds and do nothing with it. Inflation forces people to invest it in some way to avoid money devaluation.
For loans, inflation reduces the real value of your loan with time. With current decades-long loans it helps to reduce the pressure of the loan on your salary.
At 3% inflation, after 10 years, your loan – even if you paid nothing back – will be reduced a 34%. With 1% inflation that is 10%.
Countries that suffer deflation have a big problem with loans, as they weight in the economy increases. Think about being paying your loan for 10 years and in real value it would be like not having paid anything at all.
Hyper-inflation is bad, that is why there are so many negative comments. But inflation is good and necessary. Deflation will destroy any economy as putting money under the bed has a positive return and zero risk.
Home prices generally follow inflation while mortgages in the US are fixed. Also borrowing money has a multiplier effect on gains due to inflation.
So yes, inflation generally increases homeowner wealth.
Another similar question I always wondered about: If GDP growth is 3%, but inflation is also 3%, does that mean that, accounting for inflation, that economy didn’t grow?
Or is that already factored in?
Hypothetically, inflation should be a good thing if you have any sort of high value asset that typically appreciates as it will appreciate too. However real estate is typically tied more to interest rates than the overall cost of goods and services. Because interest rates skyrocket in a period of high inflation, this puts pressure on housing and will likely lead to a period of housing deflation while the costs of everything else goes up.
If you have no plans to sell your house, this doesn’t matter. You are in a good position with a low fixed rate. However, if you want to sell, you may even see your house end up underwater depending on when you purchased it.
Latest Answers