Bill and Ben are twin brothers aged 30 who live rent-free with their mother who also pays all the household bills. Bill and Ben now plan to buy their…

Bill and Ben are twin brothers aged 30 who live rent-free with their mother who also pays all the household bills. Bill and Ben now plan to buy their own home and live together. They aim to buy a two-bedroom flat in their local area. They have found out that flats like this are currently on the market for £130,000. The general inflation rate is 2% a year but property-price inflation in their area is 5% a year. Both of these rates are expected to stay the same on average in the foreseeable future. The brothers are confident they will be able to get a fixed interest rate on their mortgage.

1.1 Briefly explain the impact of inflation on their mortgage. (2 marks)

1.2 One possibility is to build up a 25% deposit over three years. First, calculate what the 25% deposit would be now for a flat that is currently on the market for £130,000. Then use the ‘Inflation calculator’ to calculate the amount (nominal value) of the deposit they would need to save up assuming the relevant inflation rate, and that similar flats would still be on sale at the end of the three years. (4 marks)