The UK inflation rate is down to 2.3% in CPI terms. The RPI inflation measure has fallen to 3.3%. Either way, the pound has stopped losing purchasing power like a proverbial drunken sailor on shore leave. This end to our run-in with runaway inflation is to be welcomed – but maybe with a wistful sigh from those of us who enjoyed seeing our mortgage inflation hedge in action.
Popular culture spent much of the 2010s debating how to survive the zombie apocalypse.
But it was actually inflation that rose from the dead to cause chaos:
CPI measure, source: BBC
Nearly everything got more expensive. The government subsidised household energy bills just to keep the lights on!
Meanwhile the pace of the rise in interest rates due to this inflationary upsurge was shocking. In less than two years we went from nearly-free money to the official Bank Rate at 5.25% and a bond market rout.
Those who didn’t stress-test their mortgage have felt extra pain if they left it too late to get a cheap deal.
And those who retired into a terrible sequence of returns haven’t exactly been laughing, either.
When you really get down to it
We’re all potentially made poorer in real terms1 by inflation.
When £100 isn’t worth what it was three years ago, neither is £100,000 in your pension.
To have the equivalent spending power of £100,000 in January 2021, you’d today need £131,000.
Note on numbers: I’m old-fashioned and have used an RPI inflation calculator from Hargreaves Lansdown, which is based on ONS numbers. You might argue it’s better to use the CPI figure these days, especially given CPI is the measure watched by the Bank of England. To do this you can do your own sums using the BOE’s inflation calculator. But without getting all conspiracy theory about it, I’m inclined to go with the higher measure of inflation (RPI) while we still have it.
In real terms, a typical UK private investor’s balanced portfolio is back to where it was in 2016, according to the consultants ARC:
Source: Trustnet
The benchmark here is ARC’s own ‘Steady Growth Private Client Index’, which it says is based on the most common risk profile run by discretionary managers. Something like an expensive-ish 60/40 portfolio I’d imagine. (The indices are proprietary and for clients only).
This Steady Growth Index has delivered a 4% real return since inception. But ARC calculates it must achieve an annual return of 7.3% above inflation for a decade, to get back to the real terms trend line.
Ouch! Come back money illusion, all is forgiven!
Still, it’s not all been bad news.
Crucially and as a direct result of the bond crash, expected returns from fixed income are now positive and arguably quite attractive. That augurs well for today’s retirees.
Wages have risen, too. As the cost-of-living crisis abates, most of us saving for retirement should be able to increase our pension contributions.
But make no mistake, inflation has done a number on your number. You’re probably going to need a bigger pot.
The mortgage inflation hedge
Coaxing my ambling donkey back around to the topic of today’s post, a key bit of good news for anyone with a lot of debt is that their debt is almost certainly no longer worth what it was a few years ago.
Specifically, if you had a big mortgage ten years ago, then you may well still have a pretty big mortgage in nominal terms today.
But in real terms, its value is much diminished.
Caveats abound, naturally.
If you took out a big debt at a very high interest rate and didn’t pay it off, then it may have snowballed into an even bigger debt – even after inflation. Something like carrying a credit card balance that charges a double-digit interest rate that’s never paid off would fit this bill.
If you’ve had to refinance at much higher rates, that’s bad too. (Commercial property owners, I’m looking at you.)
However for a very long time, residential mortgage rates have flirted barely above the inflation rate – and lately well below it.
This has made the real terms cost of carrying mortgage debt roughly zilch, thanks to the very same value-eroding force – inflation – that’s been melting your purchasing power elsewhere.
Golden years
This was exactly why I badly wanted a mortgage in the post-financial crisis years.
Not just to buy my own home, but for the ability of debt to hedge against inflation.
Back in 2013 in a post titled Can you afford NOT to have a big cheap mortgage? I wrote:
…anyone who thinks a mortgage is bad news when inflation is running high is wrong.
An affordable mortgage secured on a real asset – a house – is an excellent thing to have at times of high inflation.
In 2013 inflation was headed towards 3%, which was enough to prompt my article that year. But even after that inflation spike proved short-lived, interest rates and mortgage rates continued to fall.
My fellow citizens were getting richer on free money. Meanwhile as a saver without any debt to my name, I was at risk of seeing my net worth being – relatively-speaking – financially-repressed away.
Long story short, I was itchy to get a mortgage – which I eventually did – for its inflation-hedging reasons almost as much as to buy my own home.
Down with debt
Here’s how this mortgage inflation hedge bolsters your finances in real terms.
Real value of debt decreases: Inflation reduces the real value of debt. Even if the amount you owe stays the same in nominal terms. Over time your mortgage becomes worth less and it’s easier to pay off.
Asset appreciation: If you own a home, its value should rise with inflation over the long-term. (UK house prices have risen by more than 3% over inflation for many decades.) As the nominal value of your house and other assets goes up and the real value of your debt goes down, your real net worth grows.
Any mortgage offers these benefits versus inflation. But a fixed-rate mortgage is especially handy.
With a fixed-rate mortgage, your monthly payments remain constant over the mortgage term. That’s at least two years, often five years, and potentially ten years or more. (It’s for the life of the mortgage in the US.)
Even as inflation causes other prices, costs, and your wages to rise, your fixed-rate mortgage payments do not increase. This means in real terms the cost of your mortgage payments decreases as the value of money diminishes. Like this your mortgage becomes more affordable on a monthly basis.
Of course interest rates will likely rise in response to inflation. That puts upwards pressure on variable mortgage rates and makes remortgaging more expensive too. More on that in a moment.
Mortgages are not risk-free! But that doesn’t stop them being a hedge against inflation.
How the mortgage inflation hedge works in practice
Suppose you have a £300,000 repayment mortgage on a fixed interest rate of 3%. For simplicity’s sake we’ll assume you took out one of the new super-long term fixes, set to run for 30 years.
Your monthly payments will be £1,265. However if inflation averages 3% per year, the real value of this fixed payment will decrease. In 10 years, it would be just £941 in today’s money.
Meanwhile the value of your home will almost certainly increase, given enough time. The price could more than double in 24 years with just 3% annual appreciation due to inflation.
By then you’d have a £600,000 home and only £83,000 left on your mortgage – which will feel like about £41,000 in today’s terms. Your monthly payments in terms of today’s money would be barely £600.
Here’s one we made earlier
We can also consider the inflation spike of the past few years.
Inflation – per the RPI measure of the cost of goods and services – was 32% between January 2020 and April 2024.
Ignoring any repayments made to reduce the mortgage balance, a £300,000 debt in 2020 is worth around £227,000 in today’s money.
Inflation has effectively reduced the debt by £73,000 – in terms of 2020 money – for you.
Bluffer’s tip! Just in case you ever find yourself stuck in a lift with a professional economist, the technical term for this is ‘Inflation-Induced Debt Destruction’.
A slightly absurd example to make the point
If this feels difficult to get your head around, let’s imagine extreme inflation of 900%.
We’ll say you’ve bought a £100,000 home with a £50,000 mortgage, for a 50% loan to value ratio.
Let’s also assume your house price keeps up with inflation, and we’ll ignore any mortgage repayments.
Your £100,000 home is worth £1m after 900% inflation. Your £50,000 mortgage is still £50,000 but it’s real terms value is now just £5,000.
The real value of the mortgage debt has fallen to a tenth of its original nominal value, even as the nominal value of the asset secured against it ten-bagged. Your loan to value ratio is now just 5%, because the house price rose with inflation but the mortgage balance didn’t budge. You are now rich in home equity!
Played out over several decades, this is exactly how your grandparent’s semi-detached house that they bought in their early 30s made them a modest fortune.
Other things to think about
What would a Monevator article be without a bushel of yeah buts? (Besides about 1,000 words shorter…)
Interest rates: The efficacy of a mortgage as an inflation hedge depends on the interest rate environment. If you lock in a low fixed-rate just before a period of high inflation, you’ll benefit greatly. Take out a mortgage at a high rate when inflation is behaving itself and the benefits are less pronounced.
Variable-rate mortgages: With these, the interest rate on your loan will very probably increase during an inflationary spike. This can partly or totally negate the benefit of a mortgage as an inflation hedge.
The risk of remortgaging a fixed rate: As per the variable rate mortgage, only more of a tense psychological thriller with a shocking climax versus a variable rates’ slasher flic thrills. If you come off a cheap fixed rate deal and take out a much more expensive one, your debt pile is again growing more rapidly and costs more to service. And again your hedging is blunted. (Plus it feels awful.)
Not a perfect hedge: I’m using the term ‘hedge’ in a way that will annoy some purists. Inflation does reduce the value of debt in real terms immediately. But assets bought with a mortgage won’t simply rise in lockstep. House prices and stock markets wobble around in the short-term. Think long-term for the full benefits to play out.
It’s the economy, stupid: Some readers have been shaking their heads throughout this article. What about the risk of not being able to pay your mortgage? Or of losing your job? High inflation usually coincides with other economic disruption that could render the strategy moot. All true. You could sell your house in a pinch – but if house prices have crashed in the chaos it might not solve the problem.
Your house isn’t the whole story: A recurring theme of my posts about mortgages (for example) is all this stuff is fungible. You have secured a mortgage on your home, but if you have investments elsewhere, then they are effectively being funded by the mortgage (because you could sell them to pay down your mortgage instead). And these assets could go up due to inflation in their own right, too. That may offset the pain of, say, stagnant house prices or higher mortgage payments.
Remember, a mortgage is just a way of funding a house purchase. People conflate choosing to run a mortgage with ‘gambling on property’. But once you’ve bought your home, the value of that asset – your house – will fluctuate, independently of how you funded it. Through this lens you’re ‘betting’ on house prices, but that’s regardless of whether you have a mortgage or not. What matters with respect to risk and the mortgage is whether you can afford to make your payments. Read my post about my interest-only mortgage to unpick this further.
Rents rise with inflation, too: UK rents have soared along with inflation over the past couple of years. In fact 2023 saw a record 9% hike. Paying off your mortgage and owning your own home will protect you from rising housing costs due to inflation and higher interest rates, obviously. But avoiding home ownership altogether to rent instead will not.
Deflation: In a scenario where money gets more valuable every year, you don’t want to owe it to anybody. Consider getting rid of your mortgage ASAP if you believe deflation is going to stick around!
Waking up to the real world
Reading all this some of you may be thinking “no shit Sherlock”, as you roll your triple-levered pork belly futures into call options on GameStop to play the gamma of meme stock legend Roaring Kitty slowing down his rate of posting 1980’s callbacks on his reactivated social media account.
(Everyone else: it’s fine not to understand that sentence. It just means you’re well-balanced and normal).
It’s true that Monevator readers do bat high versus the general populace when it comes to this stuff.
But most normal citizens do not understand the beneficial impact of inflation on debt.
Earlier this year, The University of Chicago’s Booth School released: Households’ Response to the Wealth Effects of Inflation.
The paper found:
On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion.
Once they receive information on debt-erosion, households view nominal debt more positively and increase estimates of their real net wealth.
This isn’t just a matter of academic interest. The – um – interested academics found that decisions about spending and debt changed when households better understood the impact of inflation.
Admittedly the boffins looked at Germans. Fears about debt remain embedded in that national psyche. And muted house price growth and a strong rental sector mean Germans don’t grow up on a televisual diet of property porn.
Then again, the study looked at mostly better-educated Germans, a majority of whom had mortgages.
That barely a third realised how inflation benefits those with debts is telling – and a finding I’m sure would carry to the UK and beyond, too.
Mortgages, houses, and hedge rows
Summing up, having a sufficiently chunky mortgage can be an effective hedge against inflation because inflation reduces the real value of that debt.
What’s more, the money raised by the mortgage will typically be invested in assets that can go up with inflation, such as – duh – a house but also other real assets such shares.
The mortgage inflation hedge works best when interest rates are low relative to inflation.
And as always there are risks, particularly with variable-rate mortgages and the broader macro-economic backdrop.
Carrying a big interest-only mortgage was a good financial move for the past 15 years. What’s more, this looked very likely in advance, given how governments and Central Banks were behaving – though other outcomes were certainly possible.
We might have seen deflation, say, if we’d seen the 1930s-style playbook that some pundits now say should have been employed instead of Quantitative Easing, for instance. Or perhaps a global depression in an alternative-universe pandemic. Both would have been bad for debt holders.
So we should beware hubris, carefully size whatever risks we take, and avoid going all-in on anything.
A mortgage is not for everyone, but…
As we repeatedly stress on Monevator, one size never fits all.
Besides the financial issues, some people just hate the idea of having a mortgage. They don’t want a bank having a claim on their home or monthly mortgage payments stretching off to the far horizon.
Which is absolutely fair enough.
Paying off a mortgage will never be a bad financial move. Even if you’re rich, say, and all that zero-ing your mortgage balance does for you is help you sleep at night, that’s still worth a lot.
But by the same token not having a mortgage often won’t be the best financial decision, given its relatively low cost versus other productive uses for the money.
Running a mortgage has other benefits beyond enabling you to buy a house. And inflation-hedging is on that list for me!
- Real terms means numbers after inflation is taken into account. [↩]
Thanks for a good article. Not sure my head has fully understood it yet!
“Ignoring any repayments made to reduce the mortgage balance, a £300,000 debt in 2020 is worth around £227,000 in today’s money.”
So overpaying one’s mortgage over the last few years would typically have been sub-optimal?
So, ignoring the psychological benefits of paying off a mortgage, what’s the tipping point where it does make sense to overpay? Where inflation is less than the mortgage rate?
Hi TI, I’m still reading the article but the 31% inflation since Jan-21 stopped me in my tracks (and terrified me). Looking at CPI its moved from 109 to 133.5 (jan-21 to apr-24) so about 22.5% or 6.5%pa. Did I miss something in the 31% spending power?
@Boltt — I think the problem is I’m old-fashioned and I’m using RPI as my metric. Per this calculator which uses RPI figures, January 2021 to today is an inflation rate of 30.6%.
Perhaps more erudite souls than me will explain this is a bad idea, but to be honest I’m inclined to use the higher inflation measure while we still have it and it’s still used for some investment products.
Either way I should state it in the copy, which I’ve now done — thanks!
Thanks, I think it’s time for A1Cam to post – RPi/CPI is a special interest topic for them.
As an aside, I can’t quite get onboard with the joy of a lower real terms mortgage debt as it assumed an inflationary wage increase. Whilst I welcome the FTSE100 resurgence as for FIREE I don’t feel as if I get a pay rise. I’ve also estimated that recent inflation has cost me 5% of my DB pension (actual inflation being greater than the CAP) and I used CPI, I’m not redoing the numbers with RPI!!
On a positive note gas and electric prices seem very good on Octopus trackers, at about 20p KWH for electric and 4p for gas.
@Boltt — You won’t be alone in that thinking, and indeed I almost included a section saying that whatever your own personal circumstances or feelings about it, the inflation debt-erosion effect is real. However the article was already stupidly long. 🙂
My argument would be that when people complain about the price of gas going up or bread now costing 30% more than a few years ago, they say it’s a bad thing without any particular reference to their own circumstances. (Very few people instinctively feel ‘who cares’ even if they just got a big pay rise).
And few people on a gut level rebase stock price or house price moves upwards to consider the effect of inflation. They just cheer them along. (With honorable exceptions such as our own @ZXSpectrum48K. 🙂 )
Well if you do those things (and pretty much everyone does) then equally you should cheer along real terms debt erosion 🙂
As for CPI, yes there’s definitely a case I should have used it throughout. It’s a better index mathematically, from memory. On the other hand it excludes housing costs, and they seem relevant in a post about mortgages that alludes to rental costs etc.
I’m going to have to bite the bullet and send the email in a moment, so will have a chance to regret my choices at my leisure after that haha 😉
@TI……Hmmm, and knowing all this, it still took you a long time to “buy”, and partly, to kick inflation in the nuts.
@Barney — Agreed, nobody is perfect. 😉
While I could justify my decision making at the time (basically I thought the property/debt markets was empirically nuts, saw historical price-to-earnings all-time highs and due for a crash, and didn’t foresee extremely low interest rates for a decade-plus after the crash, partly to bailout those who would have suffered from it) it’s hopefully the biggest investing mistake I’ll make in this lifetime not to have bought a property a decade or two before I did.
I realised that inflation was fantastic if you had a mortgage around 40 years ago (before I had one myself). Everyone I spoke to about it looked at me as if I was a little unhinged (happens quite often to be honest – especially when I tell them that Bank Holidays are a crock and it would be better if they were added to your annual leave entitlement instead). They had all been programmed by the media to desire low inflation without feeling the need (or be able) to rub a couple of brain cells together. I’ve also noticed a tendency that people think it’s a great idea to have a mortgage. Until they have one and then seem to be intent on getting rid of it as soon as possible.
@TI….More than 15 years ago, I constantly urged my cousins daughter to get out of rented @ £1300 p/m and “buy”. But her dad persuaded her otherwise. Eventually she bought, and 3 years later it’s value increased by £250k, thanks to “good ole gentrification”
And thanks to inflation, I never bought a house that I could afford at the time.
While I completely agree with the article overall, there is a pretty big assumption throughout – that inflation is countered by inflation matching payrises/income used to pay the mortgage. I say this as in my bubble I’ve seen extremely few inflation matching or beating pay rises the last few years, most are below inflation or even 0% (and thank us for not laying you off)! My point is just that this isn’t an automatic benefit, you may have to job hop (and thus maybe even move house!) to see this effect in practice personally, especially on a short time horizon of 2-5 year fixed rates.
Another point it took me too long to realise. Mortgage debt payment is simple interest, investments and inflation are compound. That effect on its own is rather significant when thinking about how mortgage debt can be eroded IMO!
@TI “It’s for the life of the mortgage in the US.”
I’ve long since completely paid off my repayment mortgage (helped as long-time readers may recall by my sizeable football pools win in ’94) but I’ve dipped into some equity release via L&G since then (other providers available) for home improvements/maintenance.
The interest rate on my ER borrowing is lifetime fixed, and I’m charged around 4% on the debt . Thinking about possibly trading in my petrol car for an EV, I recently queried the rate for some possible additional ER with L&G and was quoted 8% lifetime fixed. “No thanks” on that one then but, with offspring spread in different UK locations, I shall need to grasp the EV nettle at some point.
The other current EV deterrent is my benchmark of a minimum of 300 miles per charge at motorway speeds, and a full recharge in a maximum of one hour. I’m not holding my breath!
Timely article for me.
My partner and I sold two smaller houses and combined the proceeds to buy our ‘family home’ on a 1.79% fixed rate mortgage, 4.5 years ago and I (thanks largely to Monevator) took the ‘gamble’ to take out a £150K mortgage on the £400K house rather than buy outright and debt free, which we could have afforded to do. Popped the £150K in a Lifestrategy 80% equity ISA and watched the house value go up 25%, our salaries rise about 20% in that period, and the £150K ISA did pretty well too.
So feeling pretty smug about all that (though of course it was more luck than judgement!).
Now with 6 months of mortgage term remaining… I’m faced with the dilemma… having ‘won’ on that last 5 year ‘gamble’, do I quit while I’m ahead, completely clear the mortgage off using the ISA (thus avoiding a rate hike), then head down the pub for a celebratory pint? Or do i basically run the same gambit again (albeit with probably a ~5% mortgage rate)? My heart says ‘know when you’ve won, pay off the mortgage, enjoy the taste of that pint’… my head (and the wisdom in this article) says, keep at least some mortgage.
As is usually my tactic, I’m leaning towards the middle ground; maybe retain a £50-100K mortgage, but perhaps with an offset mortgage so i can veer and haul as I go. Any insights from fellow readers welcome!
If mortgage interest rates are typically lower than inflation why do banks lend them? Don’t they lose money?
@Terry — I wouldn’t say mortgage rates are always lower than inflation, this has been more a recent history phenomena. They sometimes are though, which can be especially beneficial when other costs are going up.
My main point is just to remember the often-overlooked point that inflation erodes the real terms value of your mortgage balance. That’s the mortgage inflation hedge bit, and it definitely works best with a fixed-rate mortgage.
This all has limitations and the ‘hedging’ is choppy but it’s definitely worth keeping in mind.
@TI
“As for CPI, yes there’s definitely a case I should have used it throughout. It’s a better index mathematically, from memory. On the other hand it excludes housing costs, and they seem relevant in a post about mortgages that alludes to rental costs etc.”
That’ll be CPIH you’re after then. ONS’s preferred inflation statistic in any case.
@Boltt (#4):
RE: “…., I think it’s time for A1Cam to post – RPi/CPI is a special interest topic for them.”
Well remembered – it is indeed a bit of a ….
For some further details see, e.g. the chatter between myself, @ZX, and others starting at post #45 at:
https://monevator.com/weekend-reading-five-graphs-that-justify-the-gloom/
“But most normal citizens do not understand the beneficial impact of inflation on debt.”
Certainly not news to renters, who feel a little pinch whenever homeowning peers around the watercooler complain about inflation/COL while their asset values increase and their [30-year fixed] debts decline.
I wouldn’t dare send this excellent post to such friends, but I’m glad it’s out there 🙂
Great article, well I possibly did well taking out the largest interest only offset mortgage I could get back in 2019, remortgaged a couple of years later for a 5 year fixy which was super lucky timing. That bit is good, but on the job front my ability to keep up with inflation has been abysmal, combination of just being a bit shit, but also going part-time. So my income hasn’t really risen in any sort of meaningful way. Other assets have though I guess, its not just work related income that has to rise right…
I did CPIH adjust my portfolio returns and it was a really chastening experience. I kind of recommend doing it, but also don’t recommend doing it at the same time. Depends whether you’re a blue or red pill type of person to a certain extent.
@TI:
IIRC, the ARC study uses CPI[H]. OOI, have you deflated your Pot recently by RPI? I suspect that might just be a tad sobering.
FWIW, the only organisation that regularly gets away with ‘inflation shopping’ like this is HMG; who regularly use RPI to index what is owed to them (e.g. student loans) and CPI to index what they pay out (benefits) or better still, zero indexation of tax bands!
Re: “But most normal citizens do not understand the beneficial impact of inflation on debt.”
That can hardly be a surprise when most folks do not understand the corrosive/insidious impact of stealth policies either.
@hidemyemail
Mortgage interest is not ‘simple’ interest , it compounds in my experience of too many mortgages. (UK)
Instinctively I dislike high inflation. A tax in all but name, without Parliamentary authorisation, falling regressively on on those least able to afford it.
Contrary to what’s sometimes asserted from time to time, inflation over 5% annually hurts stocks badly, and they’re best seen as one way to try to outperform prices in the very long run, rather than an inflation hedge in the here and now.
Meanwhile, stagflation’s the worst of all scenarios. We can always spend our way out of the dreaded deflationary depression, but it’s like trying to get the toothpaste back into the tube with high inflation.
In principle, inflation is the mortgagee’s worst enemy and the mortgagor’s best friend.
But, whilst in theory, practice and theory are the same, in practice they differ.
Lenders benefit when base rates are low because they can expand the lending book as more borrowers will be able to meet lower repayments than higher ones; and rates are only low when inflation is low and slow.
And low inflation bringing lower rates means a reach for yield; encouraging practices like CDOs, and other temporarily enriching financial innovation for and from the banks. They like that, even though higher rates with higher inflation tends to mean a bigger lending margin on vanilla borrowing.
Borrowers benefit when rates are low because repayments are low; even if the low inflation associated with low rates means the real value of the unrepaid principal stays the same.
Tenants usually benefit indirectly from lower inflation because their leveraged landlords don’t have to hike the rent to meet the increased cost of the higher mortgage payments which the higher rates associated with higher inflation brings.
Re: “as you roll your triple-levered pork belly futures into call options on GameStop to play the gamma of meme stock legend Roaring Kitty slowing down his rate of posting 1980’s callbacks on his reactivated social media account”: If only 😉
In a meme stonk melt up perhaps the only viable strategy is to sell covered calls. The volatility should fall back as the mania recedes, enabling you to buy back the calls in the market more cheaply than you sold them for and to pocket the difference. If that doesn’t happen, and the strike price is reached, then you just hand over your ‘meme stonk’ stock to the call buyer at the strike price. You’ve limited your upside to the warrant/option premium received and the difference between what you brought the stock for and the strike price; but, as the option is fully covered, you don’t have to purchase the stock at the strike price if the option is called. If the stock falls below what you paid then sell immediately on a tight guaranteed stop loss. Income in neutral to bullish markets, a selling price above the current stock price in rising markets, and a small amount of downside protection in the premium received in a down market. Nice.
Am I correct to think then that a positive of a high inflationary environment will be in helping to address high global government debt levels post covid? Economies with just inflate debt away?!
p.s. the above is NOT a recommendation, less still any sort of advice!! DYOR 😉 The above can still go badly wrong in many ways: e.g. (and non-exhaustively) the price gaps down and the guaranteed stop loss fails, or the stop loss is triggered and then price turns right around and soars going on to hit the call strike leaving you to cover the call by having to go buy the stock again but now at the strike. It’s just that there’s arguably less risk with a covered call all considered than with a one way directional bet on the meme stonk alone with the hope of timing an exit successfully. Announcement ends 🙂
Am I right in thinking that (in a simple world) due to inflation and a mortgage debt relatively shrinking, mortgage overpayments can also be considered partially as an inflation hedge due to inflation compounding their effect over time on this further reduced debt pile?
Inflation reduces the real value of the debt, however there has followed higher interest rates, which may remain higher for longer.
Might that cause second order effects ? Mortgages become more expensive to service. It’s possible that going forward that lending ratios to income may be lower , as fixed rates end, then it may not be quite as easy to refinance a mortgage if your loan to value ratio is high, first time buyers struggle to purchase , house prices might fall in both real terms if prices stall and if they fall in nominal terms then perhaps a mortgage is not such a perfect hedge ?
Given mortgages are tending to have much longer lifespans, rather than the traditional 25 years…Loan to income ratios are quite high at present …
@Boltt (#4):
Re: “I’ve also estimated that recent inflation has cost me 5% of my DB pension (actual inflation being greater than the CAP) and I used CPI, I’m not redoing the numbers with RPI!!”
IIRC, your DB has been deferred for some time and you are yet to start it. In which case, your DB is subject to only revaluation. The overall effectiveness of your DB’s revaluation versus inflation (howsoever measured: CPI[H], RPI, etc) across the deferral period can only be properly enumerated once you have started your DB.
This is primarily because future inflation is unknown and unknowable. The precise form and parameterisation of the revaluation algorithm is also important. And, as “DB-land” is full of complexity, there may be other considerations (such as any GMP, etc ) too.
When you start your DB you may end up [across the deferral period]: losing out to inflation; matching inflation; or even exceeding inflation.
Time will tell!
Thought provoking article.
What gets me is that our personal inflation index is frozen in time – like when I delivered papers in 1996 for 4p each/£1.12 a day come rain or shine – that’s where my pounds worth comes from.
But time and inflation march inland my original aim in December 2005 to have a net worth of a million was met – but in r(pi)eal terms that million is £1.995m now!
I’m some way off that figure now – which disappoints because I’m nominally rich but inflation adjusted poor.
The only 3 solutions to this – keep earning and saving to hit the figure, drop the number (£625k was another one I had in mind but £1m has such a nice round feel about it) or as is the true purpose of this article, go balls deep in a BTL portfolio to allow me to ride on the crest of an inflation eroding wave.
After all, no one has had any negative experiences with BTL.
@A1Cam
The final gain/loss over the deferred period won’t be known for a few more years. I think it’s fair to say with a fixed 5% Revaluation I’m worse off in real terms due to recent CPI being greater than 5%.
I may gain again in the future but the real loss I think is banked (v a world where inflation never exceeds 5%, my ideal deferment inflation was permanently sub 2%, I’m not greedy)
IIRC there was some talk of some Revaluations being cumulative eg geometric max 5% pa. I’ve not seen one of these but they sound nice.
@Boltt (28) You mention a 5% fixed revaluation but in (4) you refer to a cap. I assume your revaluation is inflation (RPI?) capped at 5%. If your revaluation is actually a capped RPI it is possible that you will recover your position relative to CPI as RPI usually runs about 1% more than CPI. You may also have built up a lead relative to CPI inflation before inflation really took off. It also depends on which month the revaluation is applied. It is likely that there are two years where CPI was greater than 5% and possibly three years for RPI.
Although my DB pension is in payment, I also wrestle with these thoughts on my 5% capped RPI increases leaving me permanently behind relative to true inflation, whatever that is for me.
@GFF..”After all, no one has had any negative experiences with BTL”.
Thats because:
a) You’re talking to the wrong landlords
b) Looking through rose tinted
c) Never tried BTL
When you are owed 3 months rent and legally cannot enter the house, knowing that the more awkward you make it for them, the more they’ll trash it, tends to put a different perspective on it.
Assemble a “good” team, buy at auction, then sell.
@Boltt (#28):
Re: “I think it’s fair to say with a fixed 5% Revaluation I’m worse off in real terms due to recent CPI being greater than 5%.”
Undoubtedly, that sentence is true – but IMO it is not the whole story. It is probably more accurately described as: I am worse off in the sense that I am somewhat less far ahead of inflation than I used to be.
The purpose of revaluation is to “provide a measure of protection against the true value of benefits being eroded over time by the effects of inflation”. To this extent, statutory minimum revaluation is inflation capped at 5% cumulative for pension accrued up to 5 April 2009 and 2.5% cumulative for pension accrued after 5 April 2009. Companies could, of course, elect to be more generous. Also, separate rules apply for revaluation of any Guaranteed Minimum Pension (GMP) portion.
IMO, you are very fortunate to have 5% fixed revaluation!
Also, 5% fixed will almost always outperform 5% cumulative if inflation over the deferral period is less than 5%.
I take it your “I’m not greedy” comment was somewhat tongue in cheek?
@GFF — You write:
This isn’t the purpose of my article. I’m trying to explain another upside of having a lot of exposure to nominal debt.
As I’ve written before, you’ll never have a better tenant than yourself (so it’s potentially work keeping a mortgage on your own home, rather than buying BTL, contrary to what most of the FIRE crowd believes):
https://monevator.com/why-you-might-be-your-own-diamond-of-a-dream-tenant/
And there’s plenty you can do besides property with the money that would otherwise be going on paying back the mortgage:
https://monevator.com/pay-off-mortgage-or-invest/
Standard and very real caveat: life with a mortgage is riskier than life without one, and many people sleep better at night regardless if they’re debt-free. So it’s a personal choice thing.
@DavidV (#29):
There is another [quantisation] effect. Revaluation is generally applied annually. So it is quite possible that a deferral period of, say, 13.25 years gets just 13 years of revaluation applied.
Inflation increases to DB pensions in payment (aka indexation) are often capped, and IMO RPI to 5% is not ungenerous. It is also worth noting in most cases (and unlike revaluation) indexation can never be negative as they are described as an increase! Thus, at least in theory, there is another way* for indexation to catch up to “true inflation”.
*RPI generally exceeds CPI[H] and my view remains that CPIH is the best measure to use. I did favour RPI until I did a deep dive a good few years back.
This is the conclusion I came to a few years ago. I also think the ‘safer without a mortgage’ opinion is somewhat of a psychological fallacy which I’ve tried and failed to explain to friends on numerous occasions
Case in point I have a £ 270k mortgage fixed at 0.99% till Jan 2027.
I have 350k in cash and equities (mostly equities ) .
I am far more resilient in terms of liquidity than some one with no mortgage and 80k in cash even allowing for the vagaries of the stock market in my opinion