plonkee money an english-er's thoughts on personal finance

September 13, 2007

inflation is good…sometimes

Filed under: house — plonkee @ 12:00 pm

I’ve always thought that the biggest benefit of having a mortgage rather than renting was likely to be in the slow eating away of the value of the mortgage payment by inflation.

Before I bought my new house, I was renting a smaller flat for �375 per month. I estimate that if I had stayed there and the rent had increased with the rate of inflation at an average 3% annually, over 30 years I would have paid around �217K in rent.

On the other hand, assuming that mortgage interest rates stay at arount 5.5% (yes, I know that’s a big assumption), if I pay off my mortgage over the next 30 years at a rate of about �500 a month, I will have paid �180K. That’s �37K less for living in a bigger place.

I know that some of the extra money can and will be eaten up in maintenance costs, and also that I could have invested the difference between the rent and mortgage to provide a better financial return. Still, the power of inflation is very beneficial when it acts on my mortgage debt.

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