# Future value of money as it affects mortgage repayments



## finnie (28 Dec 2013)

Hi,
Just trying to get my head around something. Help appreciated.

We all know mortgage repayments get smaller in real terms towards the end of a mortgage. ie 1000 euro a month in 2013 will be a lot more of your wages  than 1000 a month in say 2033. 

Is there any way of calculating this? My current repayment is 750. What would it be equivelant to in say 10 years time? 720 euro? In 15 years 680? What assumptions  are made, what conditions need to be met?

Obviously if we have deflation then all bets are off!

Any observations welcome.


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## Brendan Burgess (28 Dec 2013)

If your  net income rises then your mortgage payment will be a lower proportion of your net income.

Let's assume 2% inflation in your net salary. 

If your net salary today is €3,000 a month, it will rise by 22% to €3,660

So your repayments of €1,000 per month will fall from 33% of your net salary to 27%.

If your salary rises by 5% a year, that will compound to 63% over 10 years or €4,900.

Your €1,000 falls to 20% of your net income. 

*How does price inflation affect this? 
*It doesn't affect it directly. However, it's assumed that net salaries will rise at or around the inflation rate.  

*How do house price changes affect this? 
*Again, they don't really.

However, if your house doubles in value over the next ten years and rents double as well, you will feel much better off. 

On the other hand, if house prices halve and rents halve, you will feel much worse off. 
*
Another important issue to consider is that your €1,000 repayment comprises interest and capital.* 

If you have 20 years left on your mortgage of €160,000 today, you are paying €600 interest and €400 capital. 

After 10 years, you will have reduced the capital balance to €98,000 so the monthly interest element will be reduced to about €400.  This is very important as the interest element is the true cost of your mortgage. The capital repayment is a form of saving.


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## Joe_90 (28 Dec 2013)

My understanding is that inflation erodes the value of your money.  In a normal economy wages will follow inflation to balance this up.

So say inflation was 2% per annum then in 10 years your €750 would equate to €615.

In 15 years €557.  By the same token if you receive a pay rise of 2% per annum for 25 years your wages go up by 34.5%.


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## finnie (28 Dec 2013)

Joe_90 said:


> My understanding is that inflation erodes the value of your money.  In a normal economy wages will follow inflation to balance this up.
> 
> So say inflation was 2% per annum then in 10 years your €750 would equate to €615.
> 
> In 15 years €557.  By the same token if you receive a pay rise of 2% per annum for 25 years your wages go up by 34.5%.



That's good news so! In 10 years my mortgage should 'look' a lot easier than it looks today. Not only because the amount owed is smaller but crucially the regular repayments are smaller in real terms.


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## STEINER (29 Dec 2013)

I remember towards the end of a relatives's mortgage term, they were still paying the princely sum of ~ £IR50 per month.  In 1968 £IR50 was worth a lot more than in 1998, very much so!


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## Brendan Burgess (29 Dec 2013)

Hi Steiner

Agreed but there was massive salary and price inflation during that period. It's possible, but unlikely,  that we will see similar levels of inflation over the next 20 years.

Brendan


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## Howardsend88 (29 Dec 2013)

Brendan, this may not be posted in the correct place as I just joined , many thanks, may I say that it is a joy to see such worthwhile information printed in your article today in the Sunday Times , in particular regarding not paying your mortgage when it appears that its more than possible with just a little rearranging.


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