Mortgages are a type of debt. They can be considered good debt, for being long-term, low interest, and being backed by collateral (your home). However, that doesn’t mean that you should keep your mortgage forever. Or do you?
Investing vs Paying the Mortgage
This is not a classic “should I invest or pay off my mortgage” type of article.
I have written a few such posts already. For example, this one about investing or paying down my mortgage. Another one is about how and why I increased my mortgage to invest the money.
No, this article is to shine a light on the “never pay it off” idea. I know it’s uncommon, but on the other hand, why not think about it?
It is definitely not that I want to keep my mortgage forever. With being a recent entrepreneur, I have chosen to start investing a little bit more conservative, as can be read here. I will pay some additional money towards my mortgage because I want to rent it out eventually.
Inflation and Mortgage Debt
If my grandparents never paid off their mortgage, there would be a 3,000 EUR mortgage on their home. Inflation automatically eats away at your loans.
Let me explain. My grandparents bought a house right after the World War 2. Converted to euros it was about 3,000 EUR, and to afford it, my grandfather had to work two or three jobs. It was crazy.
As is the norm, they paid off the mortgage on their house sometime, I don’t know when, but anyway, they’ve lived mortgage free for many years. But what if they had not paid it off?
Then their monthly cashflow would’ve been easier. After all, they would only have to pay interest and not principal every month. Also, come 2020, that house would be worth over 300,000 EUR with a mortgage of just 1% of that amount…
That is the power of inflation. Inflation makes money in the future worth less than money today. And if that money is a loan, it effectively gets lowered and lowered until it’s almost non-existent.
Real Interest
So next time you calculate your interest, consider the inflation. After all, that’s what we do with investment returns too. When we consider a 7% return, we assume that’s the return after inflation, so maybe the nominal return is something like 9% with 2% inflation.
This makes sure that when the calculator shows us we will have an X amount in the future, that the buying power of that amount is in today’s euros.
The same thing should apply to loans I think. If your mortgage interest is 2% and the expected inflation is also 2%, then effectively you’re borrowing money for free.
What do you think about the whole inflation thing in combination with loans?
4 thoughts on “How Inflation Can Completely Destroy Your Mortgage”
In the 80’s in Israel there was a period of hyperinflation, up to something like 500% at the worst, so it was a difficult period for many as they saw there life savings wiped away(and people jumped from skyscrapers), but on the other hand, those with mortgagees managed to finish paying them way earlier then they thought.
Wow, that’s amazing (and scary, to be honest). Stress and even suicide is a very serious consequence of finances spiralling out of hand, like what you describe. I guess if you had a safe (and inflation-protected) income, you won because of your debts eroding, but otherwise, nah I would just take the 2% per year please.
Thanks for stopping by!
Interesting enough I’ve been thinking about this as well as I’m nearing the start of my mortgage. It’s why I tried to get the most out of my situation while at the same time trying to prevent a too high payment that wouldn’t get covered by potential rental income.
Hi B, I agree with this, but I also believe that there’s much more to it than meets the eye.
Because the interest rate has been steadily declining since the 80’s doesnt mean it won’t ever come back up again. I think a lot of people tend to forget this, because they’ve never lived through the double-digit interest era.
That being said, I don’t believe we will ever see double-digit interest rates again, unless we default the world and restart our entire monetary system (which I do believe is becoming more and more likely eventually…). The entire world is build on a tower of debt – a debt that can never be repaid. Which is exactly why the “small” people like us are now thinking: FUCK IT! Why should I pay off my debt?!
I myself have recently decided to stop paying down on my principal in the coming years, simply because I don’t see a rising interest rate in the horizon, and because – as you state – the inflation alone will pay my interests (provided that I keep earning more money than I did last year ;) ).
I just don’t think one should take such a decision lightly: Not paying off your mortgage is adding extra risk to your portfolio. Especially if you have a flex-rate mortgage (like myself).
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