Declining Euro + Inflation = Perfect Storm for Tracker Mortgage Holders?

BenEadir

Hi all,

A friend of mine has a large mortgage (considerable negative equity if selling now) which is a 25 year interest only tracker at ECB + 1.1%. Principal repayments can be made during the term of the mortgage but are discretionary. My friend is convinced that his best strategy is to stick to making interest only payments and let the declining Euro and Inflation over the long term bail him out of his negative equity i.e. by the time he is required to repay the principal on the house (the year 2035) the amount in Euro will have depreciated so much in real terms by then that even a relatively flat property recovery will mean there is considerable equity in the house by 2035 allowing him to sell it, pay the principal and buy a retirement apartment either here in Ireland or Spain.

Is there any merit in his argument? Is he mad not making principal repayments? Is he building up a big problem for himself and his family down the road?

I've tried to convince him that he should just concentrate on paying off his total mortage asap but he thinks I'm the one who's mad!!

Any cogent arguments from the economic guru's here which I can use would be much appreciated.

Regards,

Ben

BenEadir

Wow, 66 views and not a single comment or opinion!!!

I guess if my friends position was indeed crazy someone here would have pointed out why.

I personally still can't see how his logic makes any sense but I guess it does???

Flamed Diving

Trying to track the expected pattern of exchange rates is notoriously difficult. In addition, the effect of the various liquidity injections is likely to be negated by the rampant deflation that we have been witnessing. I am speaking of the next 18 months, max. Trying to predict what happens beyond that is just guesswork, which is what your friend is doing. Tell him to line up his options on a wall, attach a blindfold and fling a dart at his options. Same difference.

cavedave

Advising people on what to do with their life savings is slightly dodgy. The internet is designed for scantily clad people and talking cats not this.

Is the decision save money in your mortgage or save it in stocks and pensions and such? Because more often the choice is save money in a mortgage or spend it on booze and TV's. So if the choice is between two savings strategies I don't know which is best. If it is a choice between the saving scheme of saving and one of not saving. The saving one is a better saving scheme. How is that for a tautology?

BenEadir

Thanks for the clarification!! I guess his strategy is no better or no worse than anyone else at this crazy time.

Hasschu

At what point would he encounter discomfort as interest rates rise? Can he lock into long term rates now that are below his discomfort point. If so serious consideration has to be given to locking in. Interest rates are at historic lows and nothing remains at historic extremes for very long. Stagflation is a risk, that is economic stagnation accompanied by inflation. The ECB's mandate is to fight inflation without wreaking havoc on the economy a very difficult task in a period of stagflation. If EU economies begin to grow and inflation remains near ECB targets then interest rates will remain reasonable, this is the most likely outcome in my opinion. I am cautious by nature and a firm believer that a bird in the hand is worth two in the bush so I would lock in if long term rates looked comfortable to me right now.

BenEadir

Thanks Hasschu, that's an interesting analysis. I don't think my mate has thought it through to the Nth degree but he's obviously played his cards so hopefully it'll work out for him.