Your Income Will Not Increase with Inflation Your debt will still be worth less every year, but your pay will also be worth less every year. If this is the case, then it may make sense to make extra payments and pay off your mortgage quicker.
Sarah Coles, personal finance expert from Hargreaves Lansdown, says: 'At a time of high inflation, if you pay down your mortgage then the higher rate of interest you are being charged will be applied to smaller amount of mortgage debt, which makes it more affordable.
Prioritize paying down high-interest debt
As inflation rises, central banks have been raising interest rates to make consumers spend less. These increased rates make it more expensive to borrow money, and make existing debt even more costly.
Since money is worth less in real terms in times of inflation, this means that borrowers have to repay less than they received.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
Another downside to paying off your mortgage early is the potential prepayment penalties. Because it eats into their ability to make a profit, lenders charge fees when you pay your mortgage off too early. While prepayment penalty fees can vary, most are a small percentage of the outstanding loan balance.
Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .
Inflation brings most benefits to debtors because people seek more money from debtors in order to meet the increased prices of commodities.
With interest rates rising along with worries about an economic slowdown, now is a good time to pay down credit card balances and bolster emergency savings, financial experts say.
The faster you pay off your debt, the less you'll pay in interest. If you have high-interest debt, such as credit card debt, you can save a lot of money by focusing on paying off your debt before you save.
Inflation doesn't directly affect credit scores but can influence the behaviors that scoring models use to determine scores, such as payment history and credit utilization.
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
Completing a mortgage payoff early could save you a bundle of money, not to mention years of not having a big payment hanging over your head each month, according to Dave Ramsey, financial guru, author and host of “The Dave Ramsey Show.”
For all homeowners, owning property can be a useful hedge against inflation, due to its effect on debt. As your homes' value is likely to rise over time, your loan-to-value ratio (LVR) will naturally decrease giving you the benefit of additional equity.
Inflation benefits those with fixed-rate, low-interest mortgages and some stock investors. Individuals and families on a fixed income, holding variable interest rate debt are hurt the most by inflation.
This happens because inflation hurts the lower incomes but actually enriches the higher incomes. Imagine a family making $30,000 with no assets seeing a 5 percent annual inflation rate. They see their expense rise by 5 percent (losing $1,800 in buying power due to the inflation) and have no way of making it up.
Commodities like gold, oil, and even soybeans should increase in price along with the finished products that are made with them. Inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS), tend to increase their returns with inflationary pressures.
Gold is frequently mentioned as the best choice for smart stagflation investing. While its value is sometimes overinflated, there is some truth to the hype. The value of gold and other precious metals tends to remain stable in the face of most other financial uncertainty.
In fact, O'Leary insists that it's a good idea to be debt-free by age 45 -- and that includes having your mortgage paid off. Of course, it's one thing to shed a credit card balance by age 45. But many people don't first buy a home until they reach their 30s.
Save on interest
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.