How Inflation Affects Property and Mortgage Debt
June 10, 2024
Inflation can reduce the real value of mortgage debt, but it doesn’t reduce the balance on your mortgage statement. That distinction is central to how I think about property investing. The pounds you owe may become worth less in purchasing-power terms, while the lender still expects the same pounds back.
In my June 2024 video, I discussed that long-term argument alongside something much more immediate: buying with a margin. I don’t want a property to work only because inflation or future house-price growth eventually comes to the rescue. I want the purchase price, refurbishment budget and rental income to give it a sensible foundation from the start.
Those two ideas belong together. Inflation may help the long-term position, but a good buying decision and enough cash to handle problems are what allow you to stay invested long enough to benefit.
You can watch my original video on inflation, debt and property for the discussion behind this article.
What inflation does to a fixed mortgage balance
Imagine you owe £100,000 and the general price level rises by 20% over a period of years. The debt is still £100,000. However, that amount now buys less than it did at the beginning of the period.
Measured in the starting year’s purchasing power, it is equivalent to about £83,333. The calculation is £100,000 divided by 1.2. It isn’t a £20,000 repayment, and it doesn’t mean the lender has reduced what you owe.
This is the sense in which inflation can erode debt. A fixed nominal amount becomes smaller relative to a generally higher price level. Whether that makes your own repayments easier depends on what happens to your income, rent and costs as well.
The Bank of England explains the relationship between inflation and interest rates. It’s useful background because inflation and borrowing costs don’t operate in separate boxes. The response to inflation can put pressure on the very borrower hoping to benefit from it.
Rising rents aren’t an automatic matching benefit
It’s tempting to complete the argument by assuming that rents rise while the debt stays fixed. Over a long period that can be an important part of the investment case. But I wouldn’t treat it as a guaranteed annual sequence.
An individual property’s rent depends on local demand, condition, comparable homes and the rules applying to that tenancy. It can’t simply be increased to whatever figure a spreadsheet needs. A tenant’s ability to pay matters too.
Meanwhile, insurance, repairs, labour and other expenses can rise. If those costs increase faster than rent, the monthly surplus can shrink even while the property’s nominal value looks healthier.
I’d therefore keep two separate calculations. One looks at long-term equity and the real value of debt. The other checks whether the property can meet its obligations now. A promising long-term story doesn’t pay a bill that’s due this month.
Why I want a margin when I buy
A recurring theme in my videos is trying to buy well enough that the investment has room for things to go wrong. I don’t mean a discount from an optimistic asking price. I mean a price that makes sense against a supportable valuation and the total cost of delivering the finished property.
In the June 2024 video, I discussed seeking substantial margins on projects involving refurbishment. Those were my targets and preferences, not standard returns available to everybody who buys a house needing work.
The calculation needs more than purchase price plus the builder’s first quote. Legal fees, transaction taxes, finance, surveys, holding costs and contingency can all change the result. So can a lower end valuation or a longer project.
My article about buying below market value explains why I care about the evidence behind the value. A claimed discount is only useful if the number you’re discounting from is credible.
The Corby example: price, works and end value
One example I used was a Corby property bought in 2020. I described an asking price of around £145,000 and a purchase price of £116,000, followed by roughly £35,000–£40,000 of refurbishment work.
Against the £210,000 value discussed in that video, the purchase and refurbishment figures suggest a difference of about £54,000–£59,000 before the other costs. That’s a useful starting calculation, but it isn’t the same as realised profit in the bank.
I’d still need to account for fees, finance, tax where applicable and the way any value was established. An estimate of what a property could sell for and the amount actually received after a completed sale are different things.
The lesson I took from it was the importance of the purchase price. If I’d paid substantially more at the beginning, the same refurbishment and end value would have left much less room. Buying well gave the project more resilience than simply hoping the market would rise.
My Didcot overspend shows why the margin matters
The less comfortable example was a Didcot project. I described buying at £275,000, with a refurbishment budget of around £50,000 that eventually became about £80,000. The extra £30,000 was a serious change to the original plan.
The problems included work involving sewers, footings and walls. These weren’t just decorative choices where I could easily decide to stop spending. They were the sort of building issues that can make a project more expensive than it first appears.
The end value I discussed was roughly £385,000–£400,000. Even before adding every fee and holding cost, spending £355,000 on purchase and works leaves a much narrower difference than the original £325,000 budget would have suggested.
That is exactly why I don’t want to buy at a price that requires everything to go perfectly. A margin doesn’t make an overspend enjoyable, and it isn’t a substitute for investigating the building properly. It gives you some room when reality turns out differently from the plan.
A valuation gain doesn’t solve every cash problem
A property can appear to have equity while its owner is short of money. Refurbishment bills need paying before a refinance completes, and a lender may not accept the valuation or loan amount you expected.
This matters particularly when someone plans to recover most of their money and immediately start another project. If the refinance releases less than hoped, more cash remains tied up. If it is delayed, the next purchase may no longer be achievable on the intended timetable.
I would rather know that possibility before committing than discover it when contractors, lenders or solicitors are waiting for payment. The project needs a cash plan as well as an equity calculation.
My discussion of property refurbishment mistakes looks at the wider problem of work that looks impressive but doesn’t produce the financial result expected. Spending money and creating value aren’t automatically the same activity.
Separate the different ways a property may improve your position
When I consider a property, I find it helpful to distinguish rental cash flow, value created through improvement and changes in the wider market. Inflation’s effect on the real burden of debt is another consideration, rather than a separate cheque arriving each year.
Rental cash flow is the money left after the relevant operating and finance costs. Refurbishment may increase a property’s value, but the works themselves cost money. Market growth may add equity, but it can be uneven and it can reverse.
Putting all of those into one large headline return can hide the assumptions. It can also lead to double counting, particularly if borrowed money released through refinancing is described as another layer of profit.
I’d rather see each component clearly. Then I can ask which parts are supported by today’s evidence and which depend on a future outcome. That makes it much easier to decide whether the reward justifies the risk.
Stress-test the period before the long-term benefits arrive
The practical test is what happens if several things are less comfortable at once. The work costs more, the letting takes longer and the next mortgage product is more expensive. Can the investment still be held without forcing a hurried decision?
I don’t need to predict the exact combination to consider it. I can vary the refurbishment allowance, expected rent, empty period and finance cost and see how much room remains. The point is to identify fragility before buying.
A cash reserve matters here. It gives you time to make a sensible decision rather than accepting whichever option is available because the account is nearly empty. The appropriate reserve depends on the buildings and commitments involved; there isn’t one amount that suits every portfolio.
I’d also check what happens if the property doesn’t rise in value for several years. If the plan only succeeds with strong annual growth, I want to recognise that dependence honestly rather than treating it as a minor detail.
My long-term view still starts with today’s deal
I’m positive about property’s potential over a long holding period, and the changing real value of debt is part of that thinking. But confidence in the long term should make me more disciplined about the purchase, not less.
The Corby and Didcot examples show why. One illustrates the benefit of buying at a useful price; the other shows how quickly unexpected work can consume the space you thought you had. Neither removes the need to check current costs and finance on a new project.
For me, inflation is a supporting argument. The main decision still comes back to whether I understand the property, can fund it properly and can hold it through a less favourable period. That’s the position from which long-term opportunities are most useful.
If you’d like to work through your own property plans, book a free 30-minute call. You can also explore the Starter Club or find out about Done For You for support with your next step.