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!