Mortgages are a type of debt. They can be considered good debt, for being long-term, low interest, and being backed by collateral (your home). However, that doesn’t mean that you should keep your mortgage forever. Or do you?
Investing vs Paying the Mortgage
This is not a classic “should I invest or pay off my mortgage” type of article.
No, this article is to shine a light on the “never pay it off” idea. I know it’s uncommon, but on the other hand, why not think about it?
It is definitely not that I want to keep my mortgage forever. With being a recent entrepreneur, I have chosen to start investing a little bit more conservative, as can be read here. I will pay some additional money towards my mortgage because I want to rent it out eventually.
Inflation and Mortgage Debt
If my grandparents never paid off their mortgage, there would be a 3,000 EUR mortgage on their home. Inflation automatically eats away at your loans.
Let me explain. My grandparents bought a house right after the World War 2. Converted to euros it was about 3,000 EUR, and to afford it, my grandfather had to work two or three jobs. It was crazy.
As is the norm, they paid off the mortgage on their house sometime, I don’t know when, but anyway, they’ve lived mortgage free for many years. But what if they had not paid it off?
Then their monthly cashflow would’ve been easier. After all, they would only have to pay interest and not principal every month. Also, come 2020, that house would be worth over 300,000 EUR with a mortgage of just 1% of that amount…
That is the power of inflation. Inflation makes money in the future worth less than money today. And if that money is a loan, it effectively gets lowered and lowered until it’s almost non-existent.
So next time you calculate your interest, consider the inflation. After all, that’s what we do with investment returns too. When we consider a 7% return, we assume that’s the return after inflation, so maybe the nominal return is something like 9% with 2% inflation.
This makes sure that when the calculator shows us we will have an X amount in the future, that the buying power of that amount is in today’s euros.
The same thing should apply to loans I think. If your mortgage interest is 2% and the expected inflation is also 2%, then effectively you’re borrowing money for free.
What do you think about the whole inflation thing in combination with loans?