JLP at AllFinancialMatters has a very interesting post on the impact that inflation has on the true cost of a mortgage. He argues that, because of inflation, the dollars used to make a mortgage payment ten years from now will be worth far less than the dollars used to make a payment today. Therefore, assuming that the amount of the mortgage payment remains constant over those ten years, the cost of the mortgage essentially goes down over time.
This is a great observation, and it has really got me thinking. I was curious what the impact would be on our own mortgage, and found that adjusting for a 3% inflation rate takes our actual cost of borrowing (total payments minus starting principal) from $190K down to $54K. That's a huge difference!
As I played around with these numbers, it occurred to me that this principle can also be used to accelerate a debt paydown. If we were to increase our mortgage payments by 3% each year, we would shorten the life of our mortgage by six years, while further lowering the adjusted cost of borrowing to $44K. Obviously, the challenge is in actually finding that extra 3% each year, but by really making a commitment and developing a sufficiently lean budget, this may very well be manageable.
I'll be looking very seriously at implementing something like this in the new year. I'll let you know how it goes.