What Happens to Mortgage & Credit Card Debts in a Dollar Devaluation?

by Ciaran John

A devaluation of the dollar would occur as a result of government policy makers or market forces reducing the value of the dollar when compared with other currencies. A devaluation would have a profound effect on all areas of the economy. In the short term, it could work in the favor of some mortgage holders. Conversely, a devaluation of the dollar could hurt people who plan to apply for variable rate products such as credit cards.

Fixed Rates

Currency devaluation has no direct impact on fixed rate loan products. If you currently pay $1,000 per month on your mortgage, you would continue to pay that amount regardless of a devaluation of the dollar. Likewise, fixed rates on credit cards would remain the same so your payments would not increase. On the other end of the spectrum, the lenders and investors that hold your debts would lose spending power. As the dollar weakens, your creditors' expenses rise because export costs increase. Your $1,000 mortgage payment wouldn't buy as much for your creditors as it did before the devaluation occurred.

Assets

When the dollar falls in value, the value of assets actually rises. The value of your home would increase as the dollar fell. Your mortgage debt would remain the same but your loan balance would amount to less as a percentage of your home's value. If you currently owe more than your home is worth, a dollar devaluation could result in instant equity. In contrast, credit cards are unsecured debt so the rise in asset prices wouldn't provide you with any tangible benefits.

Variable Rate

In order to remain profitable, banks and lenders would have to raise rates on mortgages and credit cards to offset a devaluation of the dollar. If you have an adjustable rate mortgage, you could expect your rate to rise at the next reset. However, increases cannot exceed rate caps that are included in your mortgage contract. Generally, banks have the right to adjust rates on variable rate credit cards at any time as long as you receive prior notice. A dollar devaluation would almost certainly cause rates on newly issued cards to rise.

Inflation

Imports become more expensive after a currency devaluation and this drives inflation. Your fixed rate mortgage cost may remain the same but the prices of consumer goods, energy and other types of expenses would rise. Many mutual funds contain bonds that are tied to mortgages and your returns would decrease in real terms as mortgages denominated in dollars became less valuable. Additionally, stocks in banks would likely drop in value as the devaluation would reduce profit margins on existing credit cards. The benefits that a devaluation may bring to your fixed debt payments may be more than offset by the wider economic effects of the change.

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