Friday, 10 June 2011

The incredible shrinking mortgage

Wouldn't it be great if your mortgage shrank and then disappeared? Ping!

That's the usual effect of high inflation.

Price rises are painful if you're in the supermarket, filling up the car or dealing with the heating bill.

But your debts stay the same. In reality, or in real terms, they drop in value.

At the current rate at which the RPI is rising, 5.2% annually, a £100,000 loan should feel £5,200 lighter after a year.


And looking back five years, the shrinkage is nearly £20,000. That's a fifth of the loan, gone up in smoke.

Sadly, it's not quite like that this time. In the past, when inflation has rocketed, wages have risen sharply as well.

But pay is rising very slowly if at all, in cash terms, which means that in real terms pay is shrinking too.

So you are earning less to pay off less, for the moment anyway. Make sense?

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