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GloomMonger

Does Inflation Erode Debt

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Hi everyone, my first post and hopefully not a question that's been asked before :blink:

I have been following the recent economic turbulence with interest and I'm now firmly in the doomers camp!

The FTSE and Housemarket bounce of the last 3 months has got me thinking about selling my home, buying gold

and renting before it all goes bad.

However, something I can't get my head round is the concept of inflation eroding debt, especially mortgages.

I understand that wage inflation is required to pay off a mortgage with variable rate interest, but what about fixed interest

mortgages.

If we get hyperinflation, then surely if I can pay £10000 for my weekly food bill, I can also pay my fixed rate mortgage off

more quickly?

Or am I missing something?

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Hi everyone, my first post and hopefully not a question that's been asked before :blink:

I have been following the recent economic turbulence with interest and I'm now firmly in the doomers camp!

The FTSE and Housemarket bounce of the last 3 months has got me thinking about selling my home, buying gold

and renting before it all goes bad.

However, something I can't get my head round is the concept of inflation eroding debt, especially mortgages.

I understand that wage inflation is required to pay off a mortgage with variable rate interest, but what about fixed interest

mortgages.

If we get hyperinflation, then surely if I can pay £10000 for my weekly food bill, I can also pay my fixed rate mortgage off

more quickly?

Or am I missing something?

Inflation means that the amount you owe is less in real terms than it used to be, provided the interest rate is less than the rate of inflation.

I would have thought that this is more likely to happen with a fixed rate loan, as interest rates are usually increased in response to higher inflation.

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So assuming there will be a period of high inflation, apart from struggling to pay for everyday goods, all those on long fixed mortgages will pay them off very quickly. Will the banks let this happen?

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Hi everyone, my first post and hopefully not a question that's been asked before :blink:

I have been following the recent economic turbulence with interest and I'm now firmly in the doomers camp!

The FTSE and Housemarket bounce of the last 3 months has got me thinking about selling my home, buying gold

and renting before it all goes bad.

However, something I can't get my head round is the concept of inflation eroding debt, especially mortgages.

I understand that wage inflation is required to pay off a mortgage with variable rate interest, but what about fixed interest

mortgages.

If we get hyperinflation, then surely if I can pay £10000 for my weekly food bill, I can also pay my fixed rate mortgage off

more quickly?

Or am I missing something?

No, you're not missing anything. Welcome aboard.

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Don't sell your house to buy Gold ! ! !

Take everything you read on this site with a pinch of salt. It's a self-selecting assembly of people.

I have some Gold and it loses it's appeal easily. I would happily swap if for a house but unfortunately I'm on one side of the world - and its on the other.

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Can someone remind me again, how increasing food and energy costs, is going to help to "inflate away debts".

Perhaps someone who bought property with this premise in mind can explain it.

Because if those goods increase in value we will see wage inflation. If my wage goes up 10%, as do the cost of everything I buy, I am still better off assuming that my total spending each month is less than 100% of my wage.

For example

Wage: 5,000 per month

Tax etc 1,200 ish a month

Mortgage (fixed rate, 300k of debt at 5%): 1,773 per month

Other spending: 2,025 per month

Now assume 10% wage and goods inflation:

Wage: 5,500 per month

Tax etc: 1,400ish

Mortgage: 1,773 per month

Other spending: 2,025 * 110% = 2227.50

Left over= £100

That £100 can now be used to pay down the mortgage faster or for additional discretionary spending, whatever. Inflation makes a (fixed rate) debtor better off.

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Because if those goods increase in value we will see wage inflation. If my wage goes up 10%, as do the cost of everything I buy, I am still better off assuming that my total spending each month is less than 100% of my wage.

For example

Wage: 5,000 per month

Tax etc 1,200 ish a month

Mortgage (fixed rate, 300k of debt at 5%): 1,773 per month

Other spending: 2,025 per month

Now assume 10% wage and goods inflation:

Wage: 5,500 per month

Tax etc: 1,400ish

Mortgage: 1,773 per month

Other spending: 2,025 * 110% = 2227.50

Left over= £100

That £100 can now be used to pay down the mortgage faster or for additional discretionary spending, whatever. Inflation makes a (fixed rate) debtor better off.

You've got it.

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Without corresponding wage inflation the only thing that is going to get eroded is your standard of living, followed by your longevity.

Even with wage increases that tend to lag inflation, there is quite a hump to get over as interest on debts increase sharply whislt your earning power is dented by increased costs of living. If you can get over that hump (which requires headroom or spare capacity..aka: not maxing out your borrowing on some idiocracy based affordability index) then longer term you are laughing.

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In a moderate inflation situation people with fixed rates will win (but the majority of people dont have a fixed rate)

in a hyperinflation scenario:

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

http://www.usagold.com/germannightmare.html

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Without corresponding wage inflation the only thing that is going to get eroded is your standard of living, followed by your longevity.

Even with wage increases that tend to lag inflation, there is quite a hump to get over as interest on debts increase sharply whislt your earning power is dented by increased costs of living. If you can get over that hump (which requires headroom or spare capacity..aka: not maxing out your borrowing on some idiocracy based affordability index) then longer term you are laughing.

What if you are a retailer?

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Because if those goods increase in value we will see wage inflation. If my wage goes up 10%, as do the cost of everything I buy, I am still better off assuming that my total spending each month is less than 100% of my wage.

For example

Wage: 5,000 per month

Tax etc 1,200 ish a month

Mortgage (fixed rate, 300k of debt at 5%): 1,773 per month

Other spending: 2,025 per month

Now assume 10% wage and goods inflation:

Wage: 5,500 per month

Tax etc: 1,400ish

Mortgage: 1,773 per month

Other spending: 2,025 * 110% = 2227.50

Left over= £100

That £100 can now be used to pay down the mortgage faster or for additional discretionary spending, whatever. Inflation makes a (fixed rate) debtor better off.

I don't believe wage inflation would be anywhere near real inflation so I doubt it will work like the theory suggests.

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Inflation feeds into wage inflation, if you have inflation in prices you will get wage inflation later on. Price inflation causes wage inflation, because price inflation for too long without wage inflation is impossible...

Edited by AteMoose

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Because if those goods increase in value we will see wage inflation. If my wage goes up 10%, as do the cost of everything I buy, I am still better off assuming that my total spending each month is less than 100% of my wage.

For example

Wage: 5,000 per month

Tax etc 1,200 ish a month

Mortgage (fixed rate, 300k of debt at 5%): 1,773 per month

Other spending: 2,025 per month

Now assume 10% wage and goods inflation:

Wage: 5,500 per month

Tax etc: 1,400ish

Mortgage: 1,773 per month

Other spending: 2,025 * 110% = 2227.50

Left over= £100

That £100 can now be used to pay down the mortgage faster or for additional discretionary spending, whatever. Inflation makes a (fixed rate) debtor better off.

Inflation will also increase the resale value of the house your mortgage is secured on, in turn reducing the percentage of it's value that you owe.

The example I always quote is the guy I worked with when I was 20. He said that he was well pleased to be finally coming to the end of his mortgage. I asked him how much he had borrowed and it was four grand. I had just taken out a loan for a car that was two grand. Strange thing was that he still thought of his monthly payment as a millstone round his neck even though it was only about £40 a month. He was taking home over £100 a week at the time.

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Hi everyone, my first post and hopefully not a question that's been asked before :blink:

I have been following the recent economic turbulence with interest and I'm now firmly in the doomers camp!

The FTSE and Housemarket bounce of the last 3 months has got me thinking about selling my home, buying gold

and renting before it all goes bad.

However, something I can't get my head round is the concept of inflation eroding debt, especially mortgages.

I understand that wage inflation is required to pay off a mortgage with variable rate interest, but what about fixed interest

mortgages.

If we get hyperinflation, then surely if I can pay £10000 for my weekly food bill, I can also pay my fixed rate mortgage off

more quickly?

Or am I missing something?

my advise would be is. is that if your house is almost completly paid for then keep it and live in it. obviously you have equity so why convert it to a commodity only to convert it back to a house later. I sold my house 2 years ago and invested the entire proceeds £80K in gold and silver which has increased in value by 50K but I 'm only holding gold till such a time that I can sell it at a healthy profit and 50k aint enough, and then buy a house again. it comes down to your psersonal situation, yes by selling your house now and converting to PMs you will no doubt make far more money than sitting on a depreciating asset. but can you afford to sit around for a couple of years till your investment reaches its potential? thats prob the main question you should ask yourself

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my advise would be is. is that if your house is almost completly paid for then keep it and live in it. obviously you have equity so why convert it to a commodity only to convert it back to a house later. I sold my house 2 years ago and invested the entire proceeds £80K in gold and silver which has increased in value by 50K but I 'm only holding gold till such a time that I can sell it at a healthy profit and 50k aint enough, and then buy a house again. it comes down to your psersonal situation, yes by selling your house now and converting to PMs you will no doubt make far more money than sitting on a depreciating asset. but can you afford to sit around for a couple of years till your investment reaches its potential? thats prob the main question you should ask yourself

Have to say Goldfever well done with your profit on the gold, really great achievement!

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