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How inflation will have your home loan

Inflation is undoubtedly one of the phenomena that has most worried the global economy this year. How will it affect your home loan and what solutions do you have?

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Inflation consists of the devaluation of the currency at the time that the prices of products and services grow. This has been a global phenomenon that this year has worried economists from all countries. Many have explained it with the supply chain crisis and with the economic crisis that we knew would be a consequence of the COVID-19 health crisis that began in 2020. Inflation in Latin America is also explained with the social outbreaks that occurred in countries like Colombia and Ecuador during the year 2021. In the United States and Europe, this situation has also grown due to the invasion of Ukraine and the economic sanctions on Russia.

Inflation as a global phenomenon has implications on the purchase of real estate. How does this situation affect real estate buyers? How can you take advantage of it? 

Why inflation will affect your home loan

The increase in the prices of products and services negatively affects not only the value of the money we have but also the value of the money we owe. This means that in the face of economic uncertainty, interest rates for loans rise, which causes the price of mortgages to grow rapidly.

This increases the probability that buyers will take longer to repay the mortgage loan and discourages investment.

Central bank and its role

The central bank has the task of guaranteeing the stability of the financial system. So for this, it has tools that allow changes in monetary policy to ensure said economic stability. The tool that the central bank has most at hand and under its control to deal with the macroeconomy is the ability to raise or lower interest rates.

Not being able to borrow from the central bank at a profitable rate, banks can restrict lending. This has an impact on the interest rates that banks will charge to consumers, which discourages their spending.

Read also: It's Not Just Your Pocket. Inflation in Latin America Worries the World

Inflation, the economy and interests rates

What does all this have to do with it? Inflation has a great impact on business, economic and government decisions. And interest rates are a tool that governments have to establish price stability.

How does it work? If we are facing accelerating inflation, interest rates may increase in an attempt to control inflation and discourage companies from raising prices more than necessary. The same occurs in the opposite direction: if inflation slows, interest rates could be lowered to make loans cheaper and encourage investment and consumption.

For this reason, inflation has an effect on mortgages. Anyone who wants to apply for a new mortgage will have to pay more interest than they would have paid if they had obtained it before the interest increase as a measure to counteract inflation.

What solutions do you have? 

But not everything is bad. There are strategies with which you could take advantage of inflation or at least protect yourself from it. Buyers who have already obtained a real estate loan can benefit from the effects of inflation, since as the currency devalues, the real value of the debt falls with it. This positive effect depends on the type of mortgage you have taken, of course. The variable rate mortgage is not very beneficial because it depends on the inflation-interest rate.

The one that can bring positive effects or protect you against inflation is a fixed-type mortgage, in which the interest rates are already fixed. This works as insurance against inflation, which is a global fact. And you still have time to do it, because current mortgage rates give you as a buyer the possibility of making an investment of stable value and taking advantage of the rate of depreciation of money.

In any case, the best thing to do as a buyer of a property will be to advise you with an expert and see what type of mortgage is ideal for you. Studiyng all types of mortgage and comparing all rates is a part of it.

Inflation is a phenomenon that worries experts in macroeconomics and as it occurs globally, it has impacted everyone's daily life. However, there are ways that you can make a stable investment that can defend you against inflation and with which you can build a home. Solutions and strategies are at hand.