## Deposits and Debt

In late 2017, the rate of inflation in the UK was 3%, but the interest rates on bank deposits was only 0.5%. Anyone investing money by leaving it in a bank account saw the real value of their investment fall year on year. If they want to maintain the real value of their investment, they would have to make deposits regularly.
Suppose someone wanted to maintain the real value of a £100,000 investment. How much would they have had to deposit with the bank in 2017?
The real value of their deposit after 1 year would be £
$100,000 \times \frac{1.005}{1/03}=£97,573$
to the nearest pound, in 2017 pounds.
They would have to deposit £100,000-£97,573=£2427 in 2017, or
$£2427=£2500$
in £2018.
For mortgage holders the reverse is true.
Someone holding a £250,000 mortgage on which they pay an interest rate of 2.5% sees the real value of their mortgage after one year to be
$£250,000 \times \frac{1.025}{1.03}=£248,786$
to the nearest pound - a fall of ££1214. Meanwhile, the value of the house has probably increased in line with prices.
LIFE IS NOT FAIR!

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