Fighting Inflation with your mortgage payments

Inflation reduces the purchasing power of your money over time. As long there as is positive inflation $1000 today is worth more than $1000 next year. Monetary inflation is defined as an increase in the money supply and its effects are usually seen in rising raw material and consumer prices. Whatever the actual cause, if there is positive monetary inflation, your money is losing purchasing power every year.

Having some fixed rate secured debt such as a mortgage can be seen as a way of preserving your purchasing power over time. For example your $2000 monthly payment on your $400,000 4.5% 30 year mortgage will still be same today as it will be in 30 years. However due to inflation in 2042 that $2000 will be able to purchase significantly less goods and services.

A mortgage can be “good” long term debt if you can comfortably afford it. It does not logically follow that because there will always be inflation you should try and get into as much mortgage debt as possible!

If you have any debt, then inflation is good for you as a debt holder, but bad for the bank as the lender. You could also see your mortgage as a way to combat the steadily decreasing purchasing power of your US dollars.

This normally works over long periods of time like a 30 year mortgage.

But can apply the same principal on a smaller time frame? Using the float my mortgage method you can borrow money for a short term period to pay your mortgage. As long you borrow the money at a lower rate than the inflation rate – you will be ahead of inflation.

Assume you get a 2% loan for 1 year, and you believe the annual inflation rate is 3%. In actual dollars it will look like lost 2% on the loan. But your actual inflation adjusted spending power is positive 1% (that is the inflation rate minus loan rate). If the loan rate is lower than the inflation rate you are ahead.

The government stated Consumer Price Index (CPI) is a generally accepted way of measuring inflation for consumers. For example on Aug 15th 2012 the CPI had increased 1.4% in the last 12 months. Some people believe that these government inflation numbers are really unstated and do not explain people’s perception of eroding middle class spending. No matter who you believe, the real world experience is that consumer prices are rising and your dollars buy less and less each year you hold on to them.

The Float My Mortgage method pays your mortgage payments now today with other peoples money, but does not actually pay them until 1 year or more later! This is the “floating” part of the Float My Mortgage method that combats inflation.

This inflation benefit is difficult to define exactly, because it is hard to know the “real” inflation rate. For this reason we never include the inflation rate in your Float My Mortgage savings. However “floating” your mortgage payments to combat inflation is still a real world benefit for the Float My Mortgage method.