Paying Down One’s Mortgage In An Inflationary Environment
When it comes to paying off your mortgage, I’m in the camp that you might be able to generate a better return, but I’d never try to convince you NOT to pay off your mortgage. It’s a guaranteed return, a way to get debt free, and significantly lower your living expenses. When you start to consider future inflation, however, it definitely makes you pause with regards to paying off your mortgage.
Why? Well, in inflation, debts become less. If you owe $200,000 on your home and through inflation, the value of your money essentially is cut in half, well your debt is essentially now $100,000 (very basic example).
So, as we wait to see how this grand experiment in economic policy plays out, I start to wonder if it even makes sense to regularly pay down extra money on your mortgage – for example, maybe paying an extra $300 each month on your principal. In a normal situation, I’d say that’s a great thing to do.
What’s an alternative?
Consider this… maybe, instead of putting that $300 into your mortgage every month (or $1000 or whatever), you put that into some sort of savings or investment vehicle. While you wait in the coming years for inflation (or not inflation), you will have cash to then dump into your mortgage to pay it off if you decide at that time that is a proper strategy.
Here are the problems with that that I see:
- You’re savings or money invested (that will eventually be used for your mortgage) will need to be inflation protected – not difficult but not just a matter of dumping into savings accounts
- By waiting to pay down part of your mortgage, you’re losing the compounding factor – if you were to pay down $10,000 today on your mortgage, every payment from here on out will pay off a little more principal where if you kept that $10,000 in savings, you’re not paying off that small amount extra each month.
The main advantage of this strategy is that it prevents the following scenario: Consider the scenario where you dump a couple ten thousand dollars into your mortgage, then we get very high inflation. That money you put into your mortgage has now definitely lost much of its effectiveness.
The solution… Maybe the solution is to do a blend of the above strategies. If you have $500 extra to pay down your principal each month, maybe you do $250 of it, and stash the other $250 of it.
Paying down your mortgage is great, but I think you need to combine it with something hedged to inflation. Maybe, purchase a few silver coins each month in addition to paying down your mortgage.
If you’re not sold on inflation, read this article which is the best article I’ve read in a while on why inflation is coming.
What are your thoughts on paying down your mortgage with inflation potentially looming?
I think that a point is being missed here. Inflation reduces the value of today's dollar over time. That means that even during low inflation, say 1% per year, at the end of the year your dollar is worth 99 cents. If this continues for ten years, your dollar in ten years is only worth 90 cents, 1% per year times 10. This means that your $1000.00 mortgage payment in ten years is only worth $900.00. After paying 12 months of your mortgage after the eleventh year, you have essentially paid back to the bank $12,000. worth 10% less than it's worth today. After 12 months you will have saved yourself $1200.00, So why pay back in the present, money that will be worth less tomorrow. A 30 year loan at 1% inflation per year and you can see that after just ten years you have saved $1200.00. After thirty years your payment of $1000.00 per month will be worth 70% less than it is today, $700.00. l
I meant to say 30% less.
Yes. I agree completely with your assessment. My point about the original post is that if your choice is paying down a mortgage or putting the money in a savings account, you're better off paying down the mortgage because it is at a higher interest rate in most cases than the savings account. Besides, inflation will destroy your savings as easily as it diminishes the value of a mortgage. The solution buying silver coins (a store of value in real money) in a hyper-inflationary environment is probably a lot safer than a savings account. Cheers.
Nice post and I agree totally with your appraisal. My tip about the unique position is that if your alternative is paying behind a mortgage or putting the cash in an investments version, you're enhanced off paying down the mortgage since it is at an advanced interest rate in mainly cases than the investments version. As well as, price rises will wipe out your investments as with no trouble as it reduces the worth of a mortgage. The clarification buying silver coins in a hyper-inflationary atmosphere is possibly a lot safer than an investments version.
Keep it up with such a nice information.
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