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inflation is good…sometimes

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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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5 comments for “inflation is good…sometimes”

  1. You are right. Inflation does help people with long-term mortgage; especially 30 and 40-year. I wrote about this in a post that will be published next Monday…looks like you beat me to it ;-)

    Posted by Pinyo | September 13, 2007, 12:58 pm
  2. This is a great example of being able to see both sides of an issue. Inflation is mostly viewed negatively, but you can spin it to benefit you.

    Posted by fiscal musings | September 15, 2007, 5:52 am
  3. The advantage is purely psychological. it wouldn’t add up if you actually calculated it.

    Posted by Wealth Building Lessons | September 24, 2007, 6:41 am
  4. Can you make this into an article… I would love to publish it on my website at http://getprequalified.com. We would backlink…

    Let me know if you have any questions.

    Posted by dave mason | January 18, 2008, 10:45 pm

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