The low inflationary economic environment will mean future mortgage payments could be as much as four times higher as a percentage of average income, compared to previous mortgage payments, according to online bank, Egg.
Andy Deller, head of banking at Egg, said: ‘Homeowners are unaware of the real effect of inflation on their debts; if they are expecting to be in a similar financial position to their parents in the later stages of their mortgage they could be in for a real shock. Their disposable income could be squeezed at a time in life when they had hoped to top up their retirement funds or help their children through further education.’
Figures from the Council of Mortgage Lenders show that homeowners finishing a 25-year mortgage, taken out at the 1977 average amount of £8,819, faced payments equalling a mere 2% of national average monthly income in 2002. Egg believes that, based on Treasury predictions of 2.5% inflation per annum, someone borrowing the national average of £85,356 in 2002, would face payments accounting for 8.2% of monthly income in 2027.
Deller said: ‘Over the past 30 years, inflation has been the mortgage borrower’s friend, however, an ongoing low inflationary environment will mean that monthly mortgage costs eat into a higher proportion of income than ever before. The best way to counter the effect of low inflation on debt is to offset savings and make overpayments.’