Inflation And Mortgage

Irving Fisher, a reputed economist, was of the opinion that a slight increase in inflation rate could lead to an equal increase in mortgage rates. He suggested a “one-to-one†relationship between expected inflation and mortgage. This is realized over a considerable period of time. Inflation causes a decline in the purchasing power of money.

Effects of inflation on mortgage:

There are many risks involved in lending money to debtors and to individuals intending to avail of a mortgage loan when the rate of inflation is high. The different types of risks associated with inflation and mortgage can be summarized as below:

• Interest rate risk
• Inflation risk
• Maturity risk
• Liquidity risk
• Credit risk
• Reinvestment risk
• Prepayment risk

Inflation and mortgage with regard to the federal government norms:

There are creditors, who purchase United States Treasury bills, and offer loans in return. However, they are assured of the return of principal amount, when the term of the loan ends. In this context, the rate of interest earned is referred to as “ riskless†interest rate.

With regard to inflation and mortgage, as majority of the mortgage loans are available on a long term basis, mortgage is impacted by expected inflation. As the loans, provided to the common people differ from the Treasury rules, the other debtors are required to pay premiums on a monthly basis or can avail of flexible mode of premium payments.

Inflation risk: This reveals information about the inflation rate(average) during the tenure of the loan.

Maturity risk: It is related to the duration of the loan. The longer the loan tenure, more uncertain is the investment.

Credit risk: It is a condition, when it is feared that the debtor will be unable to return the principal amount of the loan along with the interest amount within the stipulated time.

Liquidity risk: It is the difficulty involved in changing the loan into cash.