If you have a mortgage, inflation is your friend. Your future payments are in fixed dollars and inflation erodes the value of the money you will have to pay. This affects the riskiness of mortgages over time.
Consider the case of a $250,000 mortgage over 25 years. In one scenario, the mortgage rate is 4% with 2% inflation, and in the other scenario, the mortgage rate is 7% with 5% inflation. Here are the monthly payments in each case along with the inflation-adjusted real value of the last payment:
Scenario 1: $250,000 mortgage, interest rate 4%, inflation 2%
Monthly payment: $1315
Real value of last payment: $803
Scenario 2: $250,000 mortgage, interest rate 7%, inflation 5%
Monthly payment: $1751
Real value of last payment: $519
Initially, the scenario 1 payments are much more affordable. However, by the end of the mortgage, the scenario 2 payments are lower in real terms. In the low inflation case, people are enticed into larger mortgages with lower payments, and these payments stay fairly high in real terms (after inflation) over 25 years. In the higher inflation case, people are forced to take smaller mortgages, but get more relief in real terms over time.
So its not just today’s lower interest rates allowing people to take on big mortgages that make mortgages riskier. The fact that payments remain higher in real terms over the life of the mortgage means that the risk of default stays higher over time. People who bought homes in the 1980s suffered with high interest rates, but at least the real value of their mortgage payments eroded quickly due to high inflation.