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How a mortgage and inflation will work to your benefit

How a mortgage and inflation will work to your benefit

Time and Date February 11th, 2013 User by menno@menno.ca Comments 9 Comments

Paying your mortgage costs money and possibly lots of it. However, it’s not money down the drain because if you keep on paying long enough, the loan will come to an end and you’ll own the property outright.

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How a mortgage and inflation will work to your benefit

How a mortgage and inflation will work to your benefit

Time and Date February 11th, 2013 User by menno@menno.ca Comments 9 Comments

Paying your mortgage costs money and possibly lots of it. However, it’s not money down the drain because if you keep on paying long enough, the loan will come to an end and you’ll own the property outright.

Through the powers of monetary inflation, one could say that debt gets eaten away very slowly but steadily - even with our current low rates of inflation.

Through the powers of monetary inflation, one could say that debt gets eaten away very slowly but steadily - even with our current low rates of inflation.

Paying a mortgage is not for ever – after 25 years (or so), you’ll be done. However, if you had remained a tenant all your life, the regular payments would never stop. As a tenant, you’re actually being kind enough to pay off the landlord’s mortgage, who’ll then have a mortgage-free rental property, thanks to your regular contributions.

A major difference between renting and owning your home is the way in which you’re paying for it. As an owner, your monthly payments will stay roughly the same each month, as your property value increases with time. After a good number of years, you can stop these monthly payments because the property is paid off in full. It’s yours. As a tenant, you rent payments will likely go up, over time (like every other cost of life). You’ll continue to pay rent “for ever”.

At first, however, ownership appears to be much more expensive than renting. Not only do you have to make monthly payments to the bank that are often larger than a comparable rent might be, you also have to come up with hard cash to get into real estate: down payment, transfer tax, lawyer fees, inspection fees … and then of course the annual property taxes and maintenance.

Through the powers of monetary inflation, one could say that debt gets eaten away very slowly but steadily - even with our current low rates of inflation.

When something cost $50 some 10 years ago and $60 now, one might say that the price has gone up but it actually got cheaper (due to monetary inflation).

INFLATION AND HOME OWNERSHIP

An increase in the general level of prices means a decrease in purchasing power. This is because you can buy less with the same amount of money. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. Price inflation is viewed as erosion of the purchasing power of money – a loss of real value. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (such as the Consumer Price Index) over time.

The good news is that home values have gone up significantly over the past decades, inclusive of a “true value increase”. An example of that would be if your house went up from $200,000 to $400,000 in a 20-year period, then you could (or even … should) deduct from that the value of the price inflation. If you were to guess that at $100,000, you would still have “made” $100,000 of real money (purchasing power) over the same period. So that’s good news twice!

Another pleasant thing about a home that you own is that you can make improvements. You can enhance the home for your own use; any increase in value will be yours too.

When something cost $50 some 10 years ago and $60 now, one might say that the price has gone up but it actually got cheaper (due to monetary inflation).

Buying a house, you're probably not embarking on a get-rich-quick scheme; instead you're building long-term wealth & stability, elements of security in a turbulent world.

IN OTHER REAL ESTATE-RELATED GOOD NEWS

Real estate values, most particularly for residences (houses or strata/condo units), tend to go up more than the rate of inflation – we’ve seen this trend for a very long time, particularly in our area and certainly when viewed over longer periods of time.

This goes to say that investing in one’s own house is a slow and secure way to build equity. There is no greater security for those nearing their retirement age, than to have a home while seeing that mortgage on that home disappear. While the home gets more and more valuable due to inflation (and market pressures), the mortgage gets paid down and will be gone at one happy day. The equity situation improves constantly, leading to an asset base that’s pretty much unbeatable. Moreover, it’s a whole lot less risky than the stock market! Another benefit that one could brag about is that the capital gain in your primary residence is not even taxable – how’s that for money-in-your-pocket.

In all, one can hardly answer a simple question like “What’s more expensive? Renting or owning a home? The comparison is tough because nobody knows the future costs of real estate (owning or renting).

When something cost $50 some 10 years ago and $60 now, one might say that the price has gone up but it actually got cheaper (due to monetary inflation).

Renting has its advantages too: if something breaks, you just call the landlord. And if you really don't like it there any longer, you can basically just pick up and leave.

ABOUT LONG-TERM RENTING

Comparing this to the situation of rented accommodations is almost scary: every so often, the amount of rent will be adjusted (up) with inflation – but income growth due to inflation often stops at a certain age. This reverse wedge is the foundation of poverty of the well-aged. With less and less spending money (pensions often aren’t indexed) and the cost of rented accommodations going up and up, it’s easy to see how poverty can set in. Unless the money “saved” from paying of not having a mortgage was put into other investment vehicles, the financial picture could be very bleak.

On the Sunshine Coast, the dream of home ownership can still be achieved with relative ease. Here, you buy more with less. More house, more land, more privacy, more peace and quiet, more clean air. The real estate values are less than half of Vancouver prices (if and when comparable). Moving to the Sunshine Coast is a lifestyle change – to be able to combine that with a long-term financial plan is just brilliant.

Obviously, there are advantages to renting and there are advantages to owning a home. What’s best in your situation may be a matter for careful consideration. However, do not extract personal financial real estate advice from this website. It’s not intended for that – however it should be seen as a forum for further discussion and thought.

Renting has its advantages too: if something breaks, you just call the landlord. And if you really don't like it there any longer, you can basically just pick up and leave.

No matter how you slice it, living somewhere costs a lot of money whether renting or buying. It's a smart idea to understand the financial ins and outs of housing.

MORE blog-article reading on finance-related topics is available below through any of these links:

The ever-changing real estate market: http://www.mennorealty.ca/Blog.php/market-when-to-change

Open house benefits, why and when? http://www.mennorealty.ca/Blog.php/open-house-quiz

Mortgage and insurance questions: http://www.menno.ca/?p=20075

Market predictions to the best of our abilities: http://www.menno.ca/?p=20197

Discrepancy asking price and selling price: http://www.mennorealty.ca/Blog.php/list-price-difference

Talk of our real estate industry: http://www.menno.ca/?p=20179

Mortgage costs at their lowest: http://www.mennorealty.ca/Blog.php/record-low-1

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9 Responses to How a mortgage and inflation will work to your benefit

  2. Genobe says:

    February 15, 2013 at 15:29

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