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|How much is your mortgage really worth?|
|Thursday, 05 November 2015|
Historically, inflation has made fixed-term mortgages seem like a sure bet. Inflation tends to reduce the value of mortgage debt, while wages and salaries tend to rise to match it, making mortgage repayments feel that little bit easier. While interest rates will rise over time in response - making things cost that little bit more - what people ‘feel’ the money in their pocket is worth softens the effect of inflation. That means higher salaries balance out higher interest rates which tend, at least initially, to lag behind inflation.
However, negative inflation produces the opposite effects. Headline interest rates - the rate quoted in loan and deposit agreements - fall to make borrowing more attractive, but the value of debt no longer sees that ‘chipping away’ effect. To make things worse, in a deflationary world wages and salaries are more likely to stagnate or fall rather than rise.
For those with a mortgage, deflation can mean a long hard struggle to pay off their debts from wages and salaries that face going down rather than up.
James Jones, Head of Consumer Affairs at Experian, commented: “For those taking out a mortgage, it is important that people work out what they can afford, and plan ahead for unforeseen costs that may make repaying debts harder over the years ahead, future-proofing their finances and ensuring they come out the other end with their credit rating intact.
“We’ve created a simple guide to help people considering a mortgage which should help people get the deal that they want, and the loan they can afford.”
A survey of people who had failed to secure a mortgage last year suggests that many are failing to do the basic research needed to get proper control of their finances:
• 13% did not know how much money they have left over at the end of the month;
• 18% did not know what monthly repayments they could afford;
• 14% did not have a big enough deposit for the property they wanted;
• 12% were unable to secure the size of mortgage they needed.
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