Mortgages and Inflation.
Posted: Mon Dec 13, 2010 12:04 am
I've been trying to understand the relationship between inflation, interest rates and choosing the appropriate mortgage based on the economic conditions. Here is where I am presently on the issue.
During recessions, the national banks tend to lower interest rates because inflation is low, and they are trying to encourage borrowing and confidence. Basically, people are in debt, being cautious with their money, afraid of making large purchases and so on. Based on this tendency, wouldn't it make the most sense for a home owner to choose a variable rate mortgage during the start of a recession because there is a certain degree of security that inflation and interest rates will be low? In Canada, rates reached extreme lows during the recession, and tended to hit extreme highs during the bubble of the last boom cycle.
And then when the economy starts to pick up again, where people gain confidence, and the boom cycle starts over again, it seems that it would be the right decision to then lock in ones variable into a fixed mortgage, and then ride out the fixed rate during the boom cycle when inflation is the highest....
Any comments?
During recessions, the national banks tend to lower interest rates because inflation is low, and they are trying to encourage borrowing and confidence. Basically, people are in debt, being cautious with their money, afraid of making large purchases and so on. Based on this tendency, wouldn't it make the most sense for a home owner to choose a variable rate mortgage during the start of a recession because there is a certain degree of security that inflation and interest rates will be low? In Canada, rates reached extreme lows during the recession, and tended to hit extreme highs during the bubble of the last boom cycle.
And then when the economy starts to pick up again, where people gain confidence, and the boom cycle starts over again, it seems that it would be the right decision to then lock in ones variable into a fixed mortgage, and then ride out the fixed rate during the boom cycle when inflation is the highest....
Any comments?