O
oysterman
Guest
TirO,
Apologies for delay in reverting.
The point you raise is a good one.
Assuming normal income multiples and that the mortgage is brand new (the stage at which there is maximum sensitivity to rate rises i.e. the worst case scenario), the first year of the 8% nominal rate/10% inflation is a bit bleak. If we assume that our borrower was earning €70k to get that scale of mortgage then 10% inflation is likely to lead to a minimum of a 10% salary increase i.e. €7000 (or €4060 after tax @ 42% - assuming no indexation of bands, which is historically rare). The increase in mortgage payments minus his net salary increase is €2864 in the first year (although much less if the above-mentioned indexation and, possibly, mortgage interest relief are taken into account) so this looks bad.
However, payout happens during the second year - if inflation remains at the same level as do interest rates there is, obviously, no further mortgage payment rise but the further €7700 (net €4466) pay rise now puts him in a more advantageous cash position than he was in when he took out the loan.
The other big gain for our borrower is the fact that in just a couple of years inflation has reduced his mortgage from being 2.86 times his salary to being just 2.26 times his salary (assuming 20 year repayment). This was really my starting-off point i.e. that a good dose of sustained inflation reduces the burden of the loan.
I am not claiming that inflation is fundamentally a good thing - but I am encouraging people to think a bit laterally when it comes to inflation and borrowing.
Apologies for delay in reverting.
The point you raise is a good one.
Assuming normal income multiples and that the mortgage is brand new (the stage at which there is maximum sensitivity to rate rises i.e. the worst case scenario), the first year of the 8% nominal rate/10% inflation is a bit bleak. If we assume that our borrower was earning €70k to get that scale of mortgage then 10% inflation is likely to lead to a minimum of a 10% salary increase i.e. €7000 (or €4060 after tax @ 42% - assuming no indexation of bands, which is historically rare). The increase in mortgage payments minus his net salary increase is €2864 in the first year (although much less if the above-mentioned indexation and, possibly, mortgage interest relief are taken into account) so this looks bad.
However, payout happens during the second year - if inflation remains at the same level as do interest rates there is, obviously, no further mortgage payment rise but the further €7700 (net €4466) pay rise now puts him in a more advantageous cash position than he was in when he took out the loan.
The other big gain for our borrower is the fact that in just a couple of years inflation has reduced his mortgage from being 2.86 times his salary to being just 2.26 times his salary (assuming 20 year repayment). This was really my starting-off point i.e. that a good dose of sustained inflation reduces the burden of the loan.
I am not claiming that inflation is fundamentally a good thing - but I am encouraging people to think a bit laterally when it comes to inflation and borrowing.