View more on these topics

&#39Low inflation will hit homeowners in the long term&#39

Today&#39s generation of homeowners could find themselves paying four times as much of their income into their mortgage as their parents because of the low inflation rate, claims Egg.

The online lender says low inflation means that homeowners will not enjoy the same erosion of the real value of their mortgage debt that their parents did.

Egg says homeowners finishing 25-year mortgages in 2002 faced payments equal to just 2 per cent of their monthly income due to the benefits of high inflation.

But those finishing their mortgage in 2027 will be committing 8 per cent of their income to their mortgage.

In his Budget earlier this month, Chancellor Gordon Brown announced that inflation is stable at 2.5 per cent and on target to stay that way for 20 years. However, the parents of current homeowners benefited from higher inflation in the 1970s and 1980s.

Head of mortgages Simon Musselle gives the example of a family buying an average home costing £13,650 in 1977, who would have typically borrowed £8,819 over 25 years and made monthly payments of £52. By 2002, this equalled just 2.3 per cent of average monthly income.

But someone buying an average house costing £120,000 in 2002 will typically borrow £85,356 and pay £499 a month for the next 25 years. Egg says this mortgage repayment will account for 8.2 per cent of monthly income by 2027.

Musselle says: “Homeowners are unaware of the real effect of inflation on their debts. If they are expecting to be in a similar financial position as their parents were in the later stages of their mortgage, they could be in for a real shock.

“Their disposable income could be squeezed at a time when they had hoped to top up their retirement funds or help their children through further education.”

Recommended

Norwich & Peterborough Building Society – Childrens&#39 Loyalty Bond

Thursday, 24 April 2003 Type: High interest account Minimum-maximum investment: £1,000-£25,000 Interest rates: 4.4% gross a year Term: Five years Offer period: Until further notice Withdrawal penalties: 180 day&#39s loss of interest Tel: 0845 3002511

Lender benders

Just a few years ago, the mortgage lending parameters seemed clear cut. Mainstream lenders accommodated uncomplicated borrowers with a standard source of income while the sub-prime lenders dealt with the problem cases who had a poor credit history and did not conform to any stereotypical template.However, the dynamics of 21st Century life have spurred a […]

Outside edge

Just because you&#39re paranoid, it doesn&#39t mean they&#39re not out to get you. Conspiracy theories abound – not least the one that says how much it would suit the FSA if the current crisis in the professional indemnity insurance market drove lots of smaller IFAs out of business and forced the rest to be consolidated.Have […]

&#39IFAs caught in FSA and FOS rules trap&#39

The Financial Ombudsman Service rules in favour of private investors far too often, according to Apcims. Speaking at an IFA conference in Geneva, chief executive Angela Knight said the FOS often forces advisers to pay compensation even though the adviser has acted legitimately, sensibly and ethically. She said there was no longer a level playing […]

A DGT with 100% access and 100% discount?

Clare Moffat, Technical Manager, looks at the benefits of pensions from an IHT perspective. 100% access and 100% discount – what type of wrapper could this be? A pension! Post flexibility there is 100% access (for those over 55) and normally pensions are inheritance tax (IHT) free. With flexibility the options available on death mean […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment