Inflation rising and effects on the mortgage.

Would people recommend going with a mortgage even if you had the cash in this situation then?

It's a suckers market

5% of a difference every year, is phenomenal. The power of compounding sees to that. And the risk, when compared to overpaying a mortgage with 20-30 years remaining on it is pretty non-existent (the risks regarding stock market investment is poor investment strategy and short duration -> a well-balanced portfolio over 20+ years is as low risk as you can get). You also have the advantage of being able to sell your stocks at any stage should you require some/all of the money during your life (which is a very real need for many people). Overpaying your mortgage often means you are locked in and don't get the benefit until the end of the life of the mortgage (which typically coincides with the later stage of your life, after you have already been hit with the sudden and significant costs/loss of earnings that can happen over a person's working life).

As for the OP, as a general rule, yes inflation is good for mortgages. However, as with most financial concepts, it is over a period of time. Even if you, as an individual, don't get a pay rise in a given year; over a period of protracted inflation, you are likely to have your wages inflated at some stage. Especially when wage inflation is the most common factor in overall inflation. As already mentioned, besides your wages, the value of the property will likely also rise, while the amount owed stays the same (or decrease as your repay).

Ultimately, however, inflation is a very general term and concept. A country with 3% inflation doesn't really mean anything to an individual in that country. It all depends on what your proportion of spending is when compared to the basket the relevant statistician is using. Rents on advertised properties may inflate hugely over the space of a year, but that has zero impact on the vast majority of people, only those who are looking to rent a new property that year. Similarly with the price of purchasing a house etc. Therefore, in a given year, a person may be better off (as the things they spend their money on have actually decreased in price), while another has had a very tough year (as their 2-3 biggest expenses have increased dramatically), but the overall "average" cost of living has only increased 3%.

There is, however, one pitfall with relation to inflation for mortgage holders that hasn't ben mentioned here. The most common weapon used to combat inflation is to raise interest rates. If you have a significant mortgage outstanding, an increase of 1, 2 or 3% can have a profound impact on your monthly repayments (hundreds of euro per month). With the government borrowing like it is going out of fashion over the past number of years (€250 billion national debt and rising) and the ECB pumping out money to combat Covid, it is likely that this inflation will catch up with us, as will the corresponding interest rate rises in the coming years.

But that 5% difference already takes into account the tax. And the impact of inflation is the same regardless of whether it is invested or whether it has been used to overpay a mortgage. As for taking out the money when the stock market is at a low point - yes, that should be avoided, but at least it is an option if you absolutely need it. But it is better to have the option than no option at all which is what happens when you overpay. And remember, most of the time over that 20+ year period won't be at a stock market low.

Ultimately, the question you have to ask is - what is the benefit of overpaying? What are you trying to achieve with your money? All you are doing is waiting 20 odd years to get a measly return. With stock market investment, you are getting a significantly higher return with the option of cashing in at any time you like.

It would be different if interest rates were much higher and/or there was only a few years left on the mortgage and you need the money immediately after the mortgage has been fully repaid. But other than that, I can't think of any scenario where overpayment is a good idea.

Higher inflation erodes debts in that it devalues them - it also devalues income, but typically incomes will rise to combat inflation (if they didnt rise you'd be worse off and more likely to change jobs etc)

This is different from asset inflation (house prices going up) which dont affect you as a mortgage holder, unless you choose to sell. Monetary inflation erodes debt (debt issued in the same currency, e.g. €) whereas asset inflation just pushes prices up, which typically dont benefit many people unless you have a 2nd property solely as an investment vehicle.

Well, not really

Richer in €s, not in purchasing power. Purchasing power is eroded by inflation, so even if you have more currency, you get the same or less than you did pre-inflation typically. Extra wage increases aim to match inflation (any extra increases are likely not because of inflation but just increases you get in the job in general, so would apply in 0 inflation scenario).

If you are on a fixed rate mortgage for say 5 years at a low rate and you have inflation pushing up interest rates then you could find that once the fixed period ends that your monthly mortgage repayment increases significantly. On a mortgage of about 400k every 1% rise in rates will result in an extra 300 euro a month.

With regards the national debt the headline figure of 250bn is not what is important because the yield moves inversely to the Bond price. So the government could buy back existing bonds at a major discount reducing the headline figure and issue new debt to pay for this whilst still having the same cost of servicing the debt. (e.g. if bond prices dropped by 20% they could reduce the headline figure of 250bn down to 200bn more or less overnight)

I agree there are a lot of other factors that would impact the yield on government debt but if you just look at the rate increase just brought about by the central banks whether it is raising the ECB rate or undertaking QT. The par value of the debt that everyone quotes can become meaningless if rates rise as it will be substantially different to the market value of the bonds. What is far more important is the ability to service the debt by balancing the books.

The other thing that people forget is all the tax that has been warehoused as part of covid has not been written off and will be paid in 2 years time. This could be used to buy some of the debt at market prices and reduce the par value of the debt.

The rate of increase is not as fast as before.

It looks like it is improving, there are concerns that it might still be higher for longer.