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&#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.”


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

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