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Economic Myths: I Can Remember When Mortgage Interest Rates Were 15 Per Cent...

Posted on the 15 March 2015 by Markwadsworth @Mark_Wadsworth

This is another one which the Baby Boomers like to pull out of the bag, sub-text: todays' first time buyers have never had it so good; high house prices are not a problem etc.
Superficially, the sums are like this:
Nowadays: thirty year mortgage of five time wages, interest rate 3.5%, mortgage repayments incl. principal repayments as % of wages = 25%.
Good old days: twenty-five year mortgage of three times wages, long run average interest rates average 8%, mortgage repayments as % of wages = 25%.
If interest rates nearly double to 15%, superficially you would expect mortgage repayments to nearly double.
What these people conveniently forget to mention is that inflation was pushing up their wages/eroding their mortgage at a rate of knots.
If you calculate annual mortgage payments as a percentage of inflation-adjusted wages, the picture for somebody who took at a twenty-five year mortgage of three times salary in 1970 is as shown.
In other words, there were a couple of years of pain at the onset, but after ten years, real mortgage payments had halved and after fifteen years they were a laughable 5% of wages:Economic Myths: I can remember when mortgage interest rates were 15 per cent...

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