Inflation and your loan: why your payment gets cheaper without getting smaller
Parents like to say their flat "paid for itself". They are not lying - inflation ate their debt. We show how much of that mechanism is left today: a PLN 2,216.97 payment in year 25 of a loan has the purchasing power of PLN 938.10. And why, despite appearances, this is not an invitation to get into debt.
Two numbers you need to separate
A mortgage is an agreement for a nominal amount. You sign up for PLN 300,000 and a payment of PLN 2,216.97, and those numbers will never change - even if in twenty years a loaf of bread costs three times as much. The agreement is not indexed to inflation. Your salary - statistically - is.
The whole effect comes from that gap. A PLN 300,000 loan, a fixed interest rate of 7.50%, 300 equal instalments:
The difference of PLN 219,633.71 is not a promotion or a relief - it is the value that inflation takes off your debt and shifts onto the bank. The bank of course knows this and has built it into the interest rate; we will come back to that later on.
The same payment, an ever smaller burden
You can see it best by following one payment over time. The amount in the transfer is identical. What changes is how much it can buy:
| Year of repayment | Payment in the transfer | Value in today's zloty | Loss |
|---|---|---|---|
| 1 | PLN 2,216.97 | PLN 2,142.00 | -3.4% |
| 5 | PLN 2,216.97 | PLN 1,866.63 | -15.8% |
| 10 | PLN 2,216.97 | PLN 1,571.65 | -29.1% |
| 15 | PLN 2,216.97 | PLN 1,323.29 | -40.3% |
| 20 | PLN 2,216.97 | PLN 1,114.17 | -49.7% |
| 25 | PLN 2,216.97 | PLN 938.10 | -57.7% |
With inflation of 3.5% a year, the last loan payment weighs on your budget 57.7% less than the first - even though the transfer is identical. But there is a hard condition, and we will take it apart in a moment: your income has to rise along with prices. If your salary stands still, this whole effect does not apply to you. The nominal payment stays fixed while your real income falls - so the payment grows as a share of your budget.
The real rate: one number that puts it in order
Instead of comparing the interest rate with inflation "by eye", finance people use the real rate. The formula looks less intuitive than simple subtraction, but subtraction gives an error that grows the higher the numbers are:
inflation - the annual rise in prices.
At 7.50% and 3.5% inflation: 1.075 / 1.035 - 1 = 3.86% (simple subtraction would give 4.00% - 0.14 percentage points too much).
And here comes something that turns many people's intuition upside down:
| Interest rate | Inflation | Real rate | Who gains |
|---|---|---|---|
| 7.50% | 3.5% | 3.86% | the bank - it really earns 3.86% |
| 7.50% | 10.0% | -2.27% | the borrower |
When inflation exceeds the interest rate, the real rate is negative: money loses value faster than the interest builds up. Formally you pay back more zloty than you borrowed, but less value. This is exactly the situation in which "the flat paid for itself" - and it is where borrowers found themselves in the years when interest rates were low and inflation jumped.
The catch you need to know about before you sign
The whole mechanism described above has one necessary condition: the interest rate must be fixed. If it is variable, inflation does not work for you - it works against you, and faster.
The chain of cause and effect is short. Rising inflation brings rises in the central bank's interest rates. Market rates go up, and with them the reference rate in your agreement. Your payment goes up - and straight away, while your salary catches up with inflation with a delay, if at all. The result: you pay a higher instalment out of a salary that has shrunk in real terms.
Nobody can predict inflation for 25 years, and anyone trying to sell you a forecast knows no more than you do. What you can do is choose a structure that is predictable in every scenario. So the decision is: do I buy certainty about my payment (a fixed rate, usually higher at the start), or do I pay less today and accept the risk (a variable rate)? It is a question about how resilient your budget is, not about a macroeconomic forecast. Before you answer, work out the payment at a rate 3-4 percentage points higher than today's and check whether you could still manage it.
The other side of the coin: what inflation does to savings
If inflation eats debt, it also eats cash - with the same force, just in the other direction. The same PLN 300,000, but sitting idle in an account:
Notice the symmetry: 57.7% - exactly the same percentage by which the real value of the last payment shrank. That is no coincidence, it is the same number seen from two sides. Inflation does not tell your debt apart from your savings.
The practical consequence concerns your emergency fund. The point is not to go without one - keeping 3-6 months of expenses in cash makes sense, because you are paying for instant access. The point is not to keep everything in a form that guarantees a real loss. And when assessing any interest rate, remember two subtractions: first the 19% Belka tax (Poland's tax on savings income), then inflation. A 5% deposit with 3.5% inflation gives a real return of about 0.53% - not 1.5%, as intuition suggests.
How to turn this into your own decision
- Compare offers by APR (RRSO), not by "expected inflation". The APR is a number from the agreement; inflation is a forecast. We explain how to read the APR in APR or interest rate.
- When overpaying, use the real rate, not the nominal one. Overpaying a loan at 7.50% with 3.5% inflation is an "investment" with a real rate of 3.86% - and that is the number, not 7.50%, to compare the alternatives with. We take this calculation apart in overpay or invest.
- Test your budget, not a forecast. Work out the payment at an interest rate 3-4 percentage points higher. If in that scenario the payment no longer fits, the decision has already been made - whatever inflation does.
- Do not take out a loan because there is inflation. A negative real rate is a side effect, not a plan. You borrow for a specific purpose whose value you understand - not as a bet on the CPI.
Do the maths yourself
Inflation calculator
Enter an amount, an inflation rate and a number of years - you will see what your money will be worth in today's purchasing power and what the real rate of return is after taking inflation and tax into account. All the numbers in this article were calculated by the same engine, so you can reproduce them to the last grosz.
Open the inflation calculatorRead also
- Overpay or invest - what rate of return an investment needs to beat overpaying your loan.
- Compound interest from scratch - the same mechanism that eats savings can work for you.
- A mortgage step by step - where in the process you choose between a fixed and a variable rate.
All the numbers in this article were calculated with the engine that powers
our calculators (js/finance.js). Inflation of 3.5% and 10% and
an interest rate of 7.50% are sample assumptions used to illustrate
the mechanism, not a forecast - future inflation and future interest
rates cannot be predicted. This text is educational and does not constitute
investment advice or an offer within the meaning of Art. 66 §1 of the Polish Civil Code.