With the Bank of England's current inflation target sitting at just 2.5%, today's borrowers takin...
With the Bank of England's current inflation target sitting at just 2.5%, today's borrowers taking on substantial mortgages will not have the benefit of the higher inflation of the past to help erode their debt, advises IFA RJ Temple.
The IFA is calling on homeowners to guard against the effects of a long-term low inflationary environment with stock market based plans to produce returns that outpace inflation.
According to research by RJ Temple the average inflation rate over the past 25 years was 5.46%. Those higher rates reduced mortgage borrowings in real terms as inflation ate away at the debt and house prices increased rapidly.
Today's homeowners are faced with a less favourable scenario: low inflation rates and a projected slow down in house price increases. The Council of Mortgage Lenders expects house prices to end 2003 nearly 7% up on the corresponding period in 2002, a much lower rate of increase than the 23% anticipated for 2002.
RJ Temple provides an example to illustrate the effects of inflation rates on property debt. A £120,000 interest only mortgage, assuming 2.5% inflation over 25 years will have a real value of £64,724. Compare this with the old inflation figures of 5.46% to the same £120,000 mortgage and in real terms it is worth £31,767.
Couple this with the fact that the average cost of a house in London, according to the Halifax House Price Index, is now £200,000, at today's inflation rate a mortgage of this value would be worth £107,878 twenty-five years from now.
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