Machine gun your mortgage

Opinion on inflation and deflation is evenly split, which is why you need to consider a dual approach to tackling your mortgage.

Inflation, deflation, reflation and disinflation, and all that machinery. If only we knew what the economy will bring, we could make better decisions.

The relatively few economists who've dared to dip into the turbulent world of media forecasting have submitted convincing arguments for a range of violently different paths over the next few years, with all sides supporting their calculations with money-supply growth (aka printing money and bank loans), velocity of circulation (how fast money is spent) de-leveraging (paying off debts), interest rates, exchange rates, commodities prices (e.g. oil imports), and government policy, amongst others.

I've read more than 30 economists' viewpoints for the UK. The balance between those worried about falling prices and those seeing inflation on the horizon is remarkably even. 23 of those viewpoints came from here. Those economists, plus two more, took part in a Telegraph survey. Whilst many of the economists' views weren't clear-cut, the Telegraph awards 11 points to the inflationists, nine to the deflationists, and five who considered the greatest possibility would be either a combination of both or nothing at all.

I've read more detailed views from eleven other economists. The result was four for inflation, four for deflation, two for nothing doing, and one for deflation followed by inflation.

In other words, economists are split right down the middle.

Be careful of your beliefs

“[The head of the Treasury] has even less chance of understanding economics – he's an economist.”

From BBC series Yes, Prime Minister

Economists' predictions unreliable, so I'm hardly going to try to do a forecast myself on the back of the handful of economics textbooks I've read. Far be it for the lower echelons of society, such as financial journalists and economic forecasters, to tell you what you should believe, but I suggest you at least be wary about holding any single view so strongly that you take reckless, one-sided bets with your money.

If you're thinking 'What kind of idiot thinks the government won't inflate our problems away?' or 'What on earth makes anyone think the government can drag us out of the path of this deflation chasm?' take the time to search for the explanations that economists with the opposing view provide. Don't succumb to confirmation bias.

Guidance for borrowers

Getting off economics and onto finance I'm back on my home turf. I'm going to split my guidance for mortgage borrowers in two, starting with defending yourself against inflation.

Inflation

In Does NS&I have a hidden agenda?, I confessed to making timid warnings about inflation-linked National Savings certificates, which have now been withdrawn. It's more than most journalists managed, but it probably wasn't enough to convince those of you who wanted certainty to buy them before it was too late. I've learned from my mistake and will do better now for mortgage borrowers, who still have time.

It's clear that borrowers are waiting for signs that mortgage rates will rise, at which point they want to fix, presumably for a long length of time. This is a dangerous game, as those contemplating National Savings certificates have learned.

The best mortgage deals will disappear very quickly, regardless of how slowly inflation builds. You'll be pleased to know this isn't an economic prediction, but an observation about how mortgage lending works.

If lenders see the dangers of inflation before mortgage borrowers, good deals will go before anyone has a chance. It's not much better if mortgage borrowers see inflation first. Lenders will swiftly note increased demand for fixes. When they've reached their sales targets at existing fixed-mortgage rates – or perhaps earlier – the deals will go. The vast majority of mortgage borrowers won't get them.

So fixed deals will get rapidly more expensive and mortgage borrowers on variable rates are going to have a nasty dilemma: do they go for the increasingly expensive fixes or the temptingly cheap variable rates? That decision won't be fun.

Mathematically, even quite a small rise sometime in the next few years could see that most people end up paying more than if they'd switched to a fix now – either because they end up switching to a more expensive fix than they could get today, or because variable rates keep on rising, wiping out the savings they made in the early years.

According to my own long-term research, at present, the best ten-year fixed rates are very cheap by historical standards (and five-year fixes are pretty good). In my view, whilst it's not guaranteed to be the cheapest option in the long run, it's one of the best times in history to fix. If you want to take advantage of this, you've got to get in early and before almost everyone else.

Deflation

With deflation, you don't particularly want to be on a fixed deal. However, as long-term fixes are as well priced as they've ever been, I'd suggest you could still take one of those deals and handle deflation another way: pay off your debts as quickly as possible. Deflation effectively makes your debts and the interest harder to pay, so you don't want large debts at that time.

Paying off your debts faster is a good hedge, because it's in most economic situations a good idea to pay down your debt and reduce the total interest bill you have to pay.

Many of you will have to make a choice between the two of these options, because after the pay cuts we've experienced you won't be able to afford both. You'll have to decide that based on your personal circumstances, but waiting to take action will probably leave you with even tougher decisions ahead. I think this is a reasonable way to machine gun your mortgage before it gets caught up in the in/de/reflation machinery.

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