Economists worldwide have consented that it is the money supply upon which the long-term effects of inflation depend. In the long run, price levels and money supply between themselves share a proportional and direct relationship. When money circulation in the economy increases, the prices of goods and services proportionally increase.
Other factors apart from the printing of new money contribute to the increase in the amount of money circulating in the economy. For instance, reduction in banks’ reserve ratio (the percentage of money that banks are required to keep in cash reserve), reduction in interest rates, Central Bank buying corporate bonds or government securities to take possession from the people who were holding it earlier giving them more money to spend, citizens’ reduced confidence in the banking system which is stopping them from keeping their money in banks, and several others play an essential role in increasing money circulation.
Hence, to see what effect inflation has on the mortgage payment, let us move ahead to delve deeper into the topic.
What Is Inflation?
When there is a general rise in the value of goods and services and a subsequent fall in the purchasing power of the people buying them, inflation arises in the economy. Purchasing power means a currency’s value expressed regarding the number of goods & services that a single currency unit can purchase.
Suppose, tomorrow, every single person receives double of their salary in their bank accounts. In the beginning, you might feel rich twice the time you were before. However, the prices of goods and services in the market would quickly rise and catch up with the increased wage rate. Soo, you will see that inflation has struck and has caused the actual value of money to return to the level where it was earlier. Thus, proving that the increase in the supply of money proportionally increases the pieces of commodities.
For mortgages, inflation does affect repayment of loans because borrowers pay back the loan amount with money whose actual value is less than its original value when you took the loan. Thus, benefitting the borrowers. Although, lenders also gain from inflation. With inflation causing prices to rise, the demand for credit increases, which is advantageous for the lenders. Hence, depending on the circumstances, inflation can benefit either the borrower or the lender. What about seeing the two cases individually?
Inflation And Its Advantage To Borrowers For Mortgage Payments
Suppose a borrower had borrowed the money before inflation hit the economy. And, with the onset of inflation, his wages were increased too. In that case, inflation will be beneficial for the borrower. The benefit arises because he will be paying the same loan amount that he had received pre-inflation, and in addition, he will be paid an increased paycheck with which he can quickly pay off the debt. The result of increased wages is that the loan interest seems less for the lender if the borrower wishes to pay his debt early from the extra income he earns.
When a business house borrows money, the cash it receives at the moment will refund it with what it earns later. The general rule of inflation is that it causes a decline in the value of a currency over time, meaning that the value of cash you have now has more worth than its value in the future. Accordingly, inflation allows debtors to pay back lenders with money worth less than its value when initially borrowed.
Inflation And Its Benefits To Lenders Concerning Mortgage Payments
There are several ways in which inflation can favor the lenders, especially regarding extending new loans. To begin with, an increase in prices means people require more credit to purchase pricy and expensive goods, especially when there has been no subsequent increase in their wages. This brings new customers to the lenders. And, higher the prices of goods, the loan amount will be higher, which helps lenders earn more interest.
For example, if the price of an air-conditioner rises from $2,400 to $ 2,600 due to inflation, the lender would earn more money because 10% (suppose) interest on $2,600 is way more than 10% interest on $2,400. Moreover, the extra $200 and the increased interest amount would take more time for the borrower to pay off his debts in total, which means more profit for the lender.
Secondly, when prices of goods and services increase, the cost of living rises too. Therefore, if people spend more to meet their increased cost of living, they will be left with a nominal amount of money to fulfill their obligations, assuming that there has not been any increase in their wages. This way, lenders will be in a gaining position because borrowers will need more to pay off their previous debts, which will enable lenders to collect interest for a more extended period.
But, the above situation may become adverse for lenders if borrowers start defaulting and are declared bankrupt. Defaulting means failing to repay a debt, including principal or interest on a loan. Nonetheless, What Happens If You Miss a Mortgage Payment? Well, suppose you fail to pay off your debts for a considerable amount of time. In that case, you are declared bankrupt by the lender, and the court releases orders for your arrest and takes possession of whatever property you have mortgaged to procure the loan. Then, the government sells the mortgaged property through auction and releases the loan amount in full.
The Lasting Words
With the increasing inflation, people are spending more of their earnings on meeting their nondiscretionary requirements, like essentials, utilities, rent, and mortgage. But, at the same time, they neglect their financial obligations. So, to live a peaceful and stress-free life, live a burden and debt-free life. And, even if you have a loan to pay, clear it off first, then spending on non-essential commodities.
Author bio:Hanna Flores is a passionate blogger. She loves to share her thoughts, ideas, and experiences with the world through blogging. Hanna Flores is associated with Tech Mag News, Plus Life Styles & Circle Box Blog, Proudly Updates, News Profy.