What Happens to Mortgage Loans During Hyperinflation?

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The Concise Encyclopedia of Economics defines hyperinflation as a state in which the monthly inflation rate rises more than 50 percent. This rise in inflation rates can cause the value of mortgage loans to plummet.

Features

  • When inflation occurs, the value of a unit of currency decreases; as a result, it takes more of that currency to buy a certain product than it did a short time ago. In these circumstances, loans that receive a fixed cash flow devalue greatly.

Types

  • If a homeowner holds a fixed-rate mortgage, he must continue to make regular payments to the lender at a fixed amount. Under hyperinflation, the loan will become almost worthless. However, if the mortgage is an adjustable-rate mortgage, the payment amount will rise in keeping with a financial index, allowing the loan to keep its value.

History

  • When Zimbawe experienced runaway inflation in 2008, many mortgages became all but worthless. Lenders and property holders sought to denominate mortgages in foreign currency to assure their continued value.

References

  • Photo Credit neighborhood homes image by Wendi Evans from Fotolia.com
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