Final answer:
An adjustable-rate mortgage's interest rate may decrease if inflation falls by 3%, leading to potentially lower mortgage payments for the homeowner. Borrowers generally prefer low-interest rates compared to inflation for lower borrowing costs, whereas banks benefit from higher interest rates relative to inflation.
Step-by-step explanation:
First, Section 32 mortgages are not mentioned in the information provided, so I will address the adjustable-rate mortgage (ARM) in relation to inflation. An adjustable-rate mortgage changes with market interest rates over the loan's life. If inflation falls unexpectedly by 3%, it is likely that market interest rates will decrease as well. This would result in a decrease in the interest rate for a homeowner with an ARM, which means that their periodic mortgage payments could potentially decrease.
Regarding the second part, when analyzing mortgage interest rates and the rate of inflation over different years, a borrower would generally prefer years when the interest rate was low compared to the rate of inflation because the real cost of borrowing—the interest rate minus inflation—would be lower. Conversely, it would be better for banks if the interest rate was high compared to inflation, as this means they receive a higher real interest rate on the money they lend out.