As prices go up and your purchasing power goes down, it’s natural to wonder how these changes will affect you as a borrower.
As prices go up and your purchasing power goes down, it’s natural to wonder how these changes will affect you as a borrower.
Read on as we uncover what to look out for when inflation is high and how, depending on your situation, it can work in your favor.
Absolutely, but not directly. Factors such as wages and interest rates play a big role in whether or not it benefits you as a borrower.
For example, we know inflation erodes the purchasing power of the dollar. So, if wages are increased to compensate for rising inflation, and the debt you owe stays fixed, then you’re in luck.
When you first borrowed money, it was more valuable. Now, you get to pay off your debt with money that’s worth less. Plus, you’ll have more money to commit to the debt thanks to the wage bump.
When wages aren’t adjusted—or are adjusted insufficiently—even if your debt remains fixed, the rising cost of living can leave you with less money to work with. This may mean it’ll take longer to get out of debt, requiring you to pay more in interest.
The interest rate situation is fairly similar. High inflation often results in higher interest rates (which we’ll talk more about in a moment). But if you borrowed money at a fixed interest rate, the changing conditions won’t affect your debt.
Unfortunately, however, the reverse is also true. If you don’t have a fixed interest rate, then yours could increase due to inflation, adding to the debt you owe.
If inflation can benefit borrowers, that means it can also leave lenders with less real profit.
During times of high inflation, the money they receive from borrowers is simply not worth as much as the funds they originally lent. So, to ensure they can make up the difference and maintain their returns, lenders typically raise interest rates.
The result? Higher borrowing costs, which make it more expensive to take on new debt or refinance existing loans.
In theory, it can be.
As prices for goods and services rise, so do property values. That means the real value of your mortgage debt decreases over time relative to the value of your home.
Also, as we touched on earlier, a fixed-rate mortgage will keep your monthly mortgage payments steady even as the value of the dollar declines.
In reality; however, things may not work out that way.
As we just learned, lenders tend to hike interest rates when inflation is high to compensate for the weakening dollar.
So, even if the value of your mortgage debt is less than it was, an adjustable-rate mortgage could leave you with more interest to pay. And if you’re looking to take out a new mortgage, rising interest rates will have a big impact on your loan terms.
When inflation is high, the knee-jerk reaction may be to rush to pay off your debt as quickly as possible. But as we saw in the first section, the situation isn’t always cut and dry.
If, based on the factors we discussed, you can pay down debt without negatively impacting your financial situation, then it could be the right move for you. However, you’ll likely need to prioritize certain debts over others…
In some states, other costs of homeownership—like property taxes—can rise with inflation, increasing your monthly mortgage payments.
But if you also have high-interest credit card debt, you’ll need to give it the attention it deserves to keep it from quickly compounding.
Additionally, if you’re on the hook for student loans, the pause on payments ended late last year. That means your interest rate has likely already kicked in again, adding even more financial pressure to the equation.
With so much on your plate, it can be tempting to pay down the biggest, scariest debt as quickly as you can. But during high inflation, paying off debt as fast and efficiently as possible takes a measured approach that accounts for all the nuances of each individual debt—interest rates, outstanding balances, etc.
With their double-digit APRs, credit cards will almost always have higher interest rates than your other debts. That said, paying down high-interest debt first is usually the right move. But if your credit card balance is low enough, it may be more prudent to focus on repaying your mortgage or student loans.
The devil’s in the details.
When prioritizing your debts, it’s crucial to consider the big picture, taking your entire financial landscape into account. What’s best for the next person won’t necessarily be best for you, and you’ll likely need to adapt your strategy as you go…
But with time, consistency, and a close eye on your cash flow and debts, you can weather the storm of high inflation.
Get in touch with one of our financial experts today. During your free one-on-one consultation, they’ll show you how the Money Max Account debt elimination software will help you pay off all your debts—including your mortgage—in as little as 7-10 years.
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