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Brother in law's guide: Seriously consider floating in the years ahead
By Bernard Hickey
Here's the short version: It's now clear that the landscape for interest rates in New Zealand (and globally) has now changed for years to come. Variable mortgage rates are now likely to be significantly cheaper than fixed rates for long periods of time, long enough to make it worthwhile to switch to variable rates to consistently get the best deal. Some may choose fixed rates to be sure of their outgoings, but those looking for the cheapest rate for the longest period are probably now best off floating. This is a change to a landscape that has been in place for almost a decade.
Here's the long version: New Zealand home owners have assumed for years that fixed mortgage rates are usually cheaper than variable rates and that choosing to fix is the default option. The only doubt in the past was for short periods at the margins when interest rates were falling fast or there was some temporary hiccup in the market. Sometimes borrowers would choose to float as rates were falling and then aim to 'pick the turn' and jump back onto fixed rates.
But what if something fundamental changed that meant New Zealand's variable rates were usually cheaper than fixed rates for years on end? I've held back for months from even suggesting this given the New Zealand mortgage market's history for most of the last decade. We're a nation addicted to fixed rate mortgages, but I think it's now time to seriously considering floating for the long term to get a better deal.
Reserve Bank Governor Alan Bollard said in the bank's March Monetary Statement (MPS) on March 11 that he now expected bank funding costs to remain elevated for a long time, partly because of increased competition for funds globally and because of moves by regulators to restrict access to the cheap 'hot' money that helped keep longer term fixed rates lower than floating rates in the past.
The Reserve Bank estimated in its MPS that these higher bank funding costs had increased to about 150 basis points (1.5%) over the Official Cash Rate in the last two years, up from around 20-30 basis points before the global financial crisis. This extra cost has effectively been bolted on to the cost of fixed mortgages. As the chart above shows, fixed mortgage rates have been rising for over a year (see blue 2 year fixed line) while floating rates (red line) have been falling.
So why has this happened and can it last? What was the shift in the tectonic plates of the financial world that turned New Zealand's yield curve upside down so it is now upward sloping? The simple answer is the Global Financial Crisis that started in March of 2008 changed everything and is still rumbling through the system. It could rumble for at least another 5-10 years.
Related Topics
The previous structure of interest rates globally and locally was just not sustainable. Essentially, the US Federal Reserve dragged short term interest rates down to near 1% for much of the period after 9/11/2001, which encouraged many banks in the Northern Hemisphere to go on a lending spree, helped along by fancy new securitisation vehicles and aggressive investment bankers in Manhattan and Canary Wharf. This massively increased the leverage of many banks globally and swamped the world with 'hot money.'
Some of that money ended up in New Zealand because our big four banks chose to fund a good chunk of their mortgage lending here from 2002 to 2008 by borrowing in those 'hot money' markets for short terms. Then the financial crisis hit and those 'hot money' markets dried up. Our banks got by through late 2008 and early 2009 with some help from the Reserve Bank, their parents in Australia and by slowing their lending.
Not so much 'hot money'
The markets are opening up again, but now regulators and Reserve Banks are keeping a tight rein on the banks. They are being forced to scale back their leverage and to borrow for longer terms so they don't have to rely on these 'hot money' markets so much in future.
This is proving more expensive for the banks. The Reserve Bank of New Zealand was the first of the central banks to bring in a 'liquidity policy' which sets a target for the banks known as a 'Core Funding Ratio.' This specifies that the banks must have 65% of their funding from stable sources such as local term deposits or from long term wholesale funds. This ratio is set to ramp up to 75% over the next couple of years.
This chart here from the Reserve Bank shows the extent of these higher funding costs and how they've increased. These increased funding costs are not going away.
Governor Bollard also made the point in the news conference that these pressures on funding costs will be around for a long time, particularly as competition for funds on global wholesale markets heats up. That's because governments are now borrowing heavily and often for long terms. That pushes up the cost of longer term wholesale borrowing, which many banks now need to use to keep their 'Core Funding Ratios' in good shape.
See Governor Bollard talking about this in this video (around 8 mins 10 secs in)
The world has changed
But there's a bigger force underpinning all this pressure on interest rates and the potential for a long term turnaround in the 'typical' shape of the yield curve in New Zealand from being downward sloping (fixed being cheaper than variable) to upward sloping (variable being cheaper than fixed). This bigger force is the de-leveraging of high debt levels of the world's developed economies.
New Zealand is one of those economies with high foreign debt and high household debt levels. Our net debt stands at 134% of GDP while household debt stands at 152% of disposable income, up from 98% and 99% respectively 10 years ago. That makes us among the most indebted countries in the developed world. Luckily for us, our international creditors don't care much because we are seen as suburb of Australia, which is seen as a province of China. But the pressure to de-leverage remains intense globally and we aren't immune.
A recent study of 44 economies over 200 years by Harvard Professor Kenneth Rogoff and Maryland University's Carmen Reinhart found that when public debt to GDP rose over 90% that developed economies' growth rates slowed by 1% per annum. Their book "This Time it's Different" indicates that debt-fueled booms are inevitably followed by periods of de-leveraging that slow growth.
One way that economies de-leverage is for interest rates to increase, reducing growth of debt and allowing the denominator (GDP) in debt to GDP to grow faster than the numerator (debt). The Rogoff/Reinhart study shows periods of de-leveraging can last for years. A widely cited McKinsey report on de-leveraging found that periods of de-leveraging in the past have lasted six to seven years on average.
This could last for years
This is all a long way of saying that variable mortgage rates could remain lower than longer term fixed mortgage rates in New Zealand (longer than than 18 months/2 years) for at least three to four years, and possibly for longer.
The pressures for higher bank funding costs (which keep fixed rates higher than variable rates) are widespread, deep, global and structural. They are being cemented in by regulatory action in both New Zealand and the rest of the world.
That's why I think it's now time to seriously consider switching to floating rate mortgages for the long term. This may not be appropriate for all borrowers, given some place a high value on certainty for their mortgage payments. The problem for most will be that that certainty now comes with a significant cost relative to variable rates.
Check out the rates
The advantages of variable rates are now clear in our mortgage rates table. Variable rates are typically now around 5.65-5.75% for the major banks, while two year fixed rates are clustered around 7.1% to 7.3%.
If, for example, the Reserve Bank starts increasing the Official Cash Rate from its 2.5% to around 5% by the end of next year, then variable rates are expected to rise to around 8-8.5%. Given fixed rates are also expected to rise by a similar amount to around 9-9.5% the choice is clear for those simply looking for the cheapest rate.
The difference between variable and fixed is now so large that it is almost impossible for a borrower to 'catch up' by choosing a fixed rate over a variable rate and hoping to get their timing right. Previously, there was enough of a cushion for borrowers to punt and get it right.
Currently, the absolutely lowest variable rate on offer is from Kiwibank and Westpac on 5.65%, with ANZ on 5.69%, National on 5.75% and ASB on 5.75%. The lowest 'fighting' fixed rates from the banks are 6.49% for 18 months from Kiwibank, 6.59% from BNZ for 18 months, 6.7% for 18 months from ASB and 5.99% from ANZ for 6 months.
Your views? I welcome your comments and insights below
59 Comments
It will be very intriguing
It will be very intriguing to see what happens as interest rates rise to 8.0% as a minimum. My bet would be that slowing growth will tend to halt interest rate rises.
My pick is the floating
My pick is the floating and short term will be historical low until 2012.
hmmm Glad you got there
hmmm
Glad you got there Bernard
;]
Simon....IMHO rates to 8% seems unlikely (for a perlonged period, it might spike there and drop back). The one factor to watch for growth is the cost of energy as part of GDP...the USA goes into recession at 4% or about $80US a barrel....the $147US was over 6% and we had a meltdown the effects of which will last a decade...then the oil price collapsed. We seem to be "safely" to $80...OPEC will not want it lower and the US is powerless to send it low unless its slits its own throat, in time demand will incraese and supply will decrease and we will see a nasty spike again, the RBNZ should hopefully look through that and not rise too fast, the high price of petrol/oil will do its work for it. So, personally I think the interest rate will at best be like oil price spikes, it will rise and then be cut quickly as the economies retch jobs...so Im very happy for floating...maybe 6 ~ 6.5% in two years...maybe....but i think we will just stagger along myself...best case....worse case, deflation....and Im more than 70% convinced on that...so I think the OCR will get to 2% within 2 years, its more likely than 6% IMHO, so Im with Joe....
hmmm Glad you got there
hmmm
Glad you got there Bernard
;]
Simon....IMHO rates to 8% seems unlikely (for a perlonged period, it might spike there and drop back). The one factor to watch for growth is the cost of energy as part of GDP...the USA goes into recession at 4% or about $80US a barrel....the $147US was over 6% and we had a meltdown the effects of which will last a decade...then the oil price collapsed. We seem to be "safely" to $80...OPEC will not want it lower and the US is powerless to send it low unless its slits its own throat, in time demand will incraese and supply will decrease and we will see a nasty spike again, the RBNZ should hopefully look through that and not rise too fast, the high price of petrol/oil will do its work for it. So, personally I think the interest rate will at best be like oil price spikes, it will rise and then be cut quickly as the economies retch jobs...so Im very happy for floating...maybe 6 ~ 6.5% in two years...maybe....but i think we will just stagger along myself...best case....worse case, deflation....and Im more than 70% convinced on that...so I think the OCR will get to 2% within 2 years, its more likely than 6% IMHO.
regards
@Simon: The issue as I
@Simon: The issue as I see it is that the RBNZ is effectively impotent with respect to retail rates going forwards.
There is such a wall of refinancing coming over the horizon from governments (USA, UK, Japan,.... Portugal, Ireland, Italy, Greece, Spain) that demand for 'money' is going to remain sky high for the foreseeable future.
If demand remains high, and the supply is low, the the price stays high - the price of money is prevailing interest rates.
How does a given borrower in NZ avoid the market position of the banks?
How does a given bank in NZ avoid the market position for funding globally? If they try to borrow from me in NZ too low, I'll put my funds with someone else who offers more (plenty of global operators in NZ and easy enough to access accounts overseas these days).
How do we avoid retail mortgage rates being 8-10% for many years to come?
Alan.
Your view on interest rates
Your view on interest rates are sound but it also depends on the inflation/stagflation direction of the world economy.If stagflation then variable is the right way to go but if inflation you could find youself with 20% interest rates as in the late eighties.I know a lot of people are in the stagflation camp,but that does'nt change the facts on the ground and that everywhere I go,super markets,the mall ,petrol station going out to dinner planed increases in gst prices are going up, and the ability of wage and salary earners to absorb these costs are limited and will need to push for increases in income to cover the cost of living.That means banks will have to pay higher interest rates to depositors to cover the decline in value of their money,which means lending costs will go up.So at the moment I'm still sitting in the inflation camp.
Got mortgage down from $315K
Got mortgage down from $315K in 2003 to $90K today, a couple of good 1 off payments I admit. Last May decided to fix 75% on 18 & 24 month terms and float the rest. Floating now $14K. I reckon I made a good decision on this but when the fixed terms expire I will pat off asap. I hope to be free of this burden by mid 2012. I reckon there will be a depression coming on in the next 18-24 months and I want to have no mortgage. Too much of the world is in the mire to see a way out of it. Alos, NZ Govt still spending like drunken sailors, Labour would be worse.
In the future i reckon the main status symbol will be a mortgage free house, not the new BMW on tick.
In my view, a problem
In my view, a problem in NZ is the limited range of mortgage products available. There are no long term fixed rates and no capped rates available.
- In the US, it is possible to fix your rate for the duration of the mortgage (e.g. 30 years). Fixing for a decade or longer makes more sense to me than fixing for e.g. 2, 3 or even 5 years, as uncertainty becomes much greater over the long term.
- In the UK, capped rate mortgages are sold. These are floating rate mortgages, but with a pre-defined maximum interest rate. They are a little more expensive than true floating rate mortgages, but offer some protection against e.g. a currency collapse or a world financial disaster leading to very high interest rates. For a small currency such as the NZ dollar, there has to be a small but real risk of an 'Iceland-style' collapse leading to very high rates (>10%).
I have chosen a floating rate for now, but would gladly pay a small premium from the protection afforded by a capped rate mortgage if it were available. I have no interest in a five-year fixed rate, as the costs are too high, and if I'm going to purchase 'protection' from high interest rates, I'd want it to last longer than five years.
In lieu of interest rate protection, I plan to use a revolving credit facility to overpay as much of the mortgage as possible early on. I could then draw down on this credit if interest rates spiked and I was struggling with repayments.
(Of course someone who knows more about markets than I do might be able to tell me how I could set up a personal spread-betting strategy or some sort of derivatives trade to effectively 'cap' my own mortgage rate)
I have a hardback copy
I have a hardback copy of Roggoff & Reinhart's book " This Time is Different " ( Amazon.com , no GST , KEY !!! ) . And it is a totally brilliant volume . At nearly 500 pages ......... if I stand on it I can reach the gummy bears off the top shelf when mummy hides them .
@Colin the planned increase in
@Colin the planned increase in GST is balanced by a decrease in PAYE...to a large extent it seems...Also the ability right now for wage earners to push through pay increases is marginal, many ppl are happy to just have a job....some things can be, indeed are being cut to compensate...we dont go out to dinner very often these days...
@Alan: The RBNZ is not totally impotent, its cant get rates lower but it can raise them. Right now variable rates are cheaper, there is sound logic as to why IMHO...yes there is a boggyman in inflation and investors demanding high interest rates, but I think there is a huge difference between wholesale rates and settings and retail that the voter sees. I do agree that this point is important, I have not as yet totally got my head around just what will happen and just what the impact will be in this area...so it might upset the apple cart but for that there needs to be real inflation, then yes it goes from benign to malignant IMHO.
For me the risk of inflation right now is very low in terms of wage inflation which sets off merry-go-rounds...indeed the copious stuff Im seeing suggests we are heading for deflation and it could be quite high. Yes some goods will get more expensive, indeed anything highly energy linked such as food, heating and transport costs is going to be expensive for the rest of our lives....I think we are unique in that we spend a significantly less proportion of our time and money on these compared with other generations, this will reverse for later geerations.
Yes some things are more, other things will and have dropped. There are silly margins on some products, its considered not what's a fair margin but what the punter is willing to pay, I think there is a huge chnage there. As they said recently, punters are full price adverse at the moment and are simply not prepared to spend in that situation, and NZ has been lucky compared to many countries...I think all this points to deflation as ppl are not spending, inflation is where they spend.
regards
@RobW: I like the idea
@RobW: I like the idea of fixing for 25years, except if you move or something happens and you need to change then its usually ugly....I recall that when mortgages periodically get to the high teens the TV stations trot out ppl who fixed for the entire term....however the issue is how much is paid back over the term, usually there is a premium...so if you are happy to pay that then yes....but the other part of fixed is the costs to break it....Ive moved across the world, Ive had to move cities for work.....I suspect I will have to do so again....
I think the best bits of advice I have heard for this coming storm are a) get out of debt and b) be liquid....with a mortgage I cant do a) but with variable I get b) to a degree...my parents had 40~50 years of job and economic stability I cant bet on that and Im sure my kids wont see it either...
So for me its dont look back and try and project history forward thinking that's your future...
regards
@RT: Different morons, same but
@RT: Different morons, same but bigger mistakes....
regards
If 5% OCR is the
If 5% OCR is the new nuetral as some are saying and because we are deleveraging (in the form of low/stagnant lending growth rather than reducing debt) then I think the OCR will be between 3-4% during the next 5 years or longer and floating rates will be hovering around 7% I can't see them hitting 8%
@Alan: Also the thing that
@Alan: Also the thing that I think stops inflation being likely (or at least high/hyper-inflation and it being sustained) is the level of debt we have now, ie the shear quantity, so interest rates only have to go up a small amount to instigate dramatic changes/effects due to the payments changing a lot, Govn's, companies and public will simply be pole axed. This I think is way different to earlier periods of sustained inflation, there wasnt the debt globally to service like there is now. So if we start to get inflation and if the interest rates rise to match then I think our [global] economy stalls very quickly and nose dives into deflation and a full blown depression.....but I dont think we will do that well...I think we are heading down now....effectively the cost of crude at $147US a barrel in July 2008 killed the global economy instead of inflation.
@kieran: I agree, but the OCR could be lower....2~4%. If we see 8% or more I think that will see speculators abandoning the housing gamble, the rents wont cover that , lick their severe wounds and things will tumble fast. ie the BBs are the most numerousm the best paid and the biggest spenders, take them out and there is a huge hole.
Q: Does and increase in
Q: Does and increase in GST in anyway effect overseas corporations more than locally owned?
Q: Does an increase in GST benefit exporters more than importers and churners (businesses re-selling into our domestic market)?
Or are they neutral?
regards
GST & OCR to both
GST & OCR to both be 25% by 2025.
Interesting bit of Intell from
Interesting bit of Intell from the field yesterday: Westpac will be dropping their asset threshold from June 1st (presumably they have some fixed lending rolling off).
They will lend no more than 65% of valuation - and they are starting to enforce it now...
My source may be wrong... anybody else hearing anything?
"...In some cases BNZ will
"...In some cases BNZ will lend up to 100% of the value of a property depending on the borrowers ability to make the repayments on the debt, the overall level of the debt and the borrower’s credit history" - BNZ’s Glenn Patrick
Do you know what asset
Do you know what asset that might be for, Slarty? Farms; owner/occ., investment or the whole spectrum? I know it's only chat, but every bit helps. Thx. In Oz W'Pac is cutting back from 92% to 87% balanced across the portfolio, I believe.
"They will lend no more
"They will lend no more than 65% of valuation – and they are starting to enforce it now…"
I'm pretty sure that's to do with apartments. They used to lend up to 75% on larger apartments and 60% on smaller ones.
Damn it! So far I
Damn it! So far I have been doing quite well doing the opposite to what Bernard advised or acted in contrary to his predictions. When he told us not to buy I bought and when he told us to fix rates I remained floating. Now he tells us to float but my gut still tells me to keep floating anyway. Perhaps I have overlooked something in my analysis of the situation that has somehow placed Bernard and myself in agreement....
At this point I just
At this point I just need to tell everyone that I fixed for 5 years at 5.9% last February. You may now tell me how great I am.
Shorts generally I agree with
Shorts generally I agree with you but this is quite a big call. Each major bank can count on one hand the amount of people that fixed for 5 years under 6% as it was a very small window. Are you having us on?
So for 19 months you've
So for 19 months you've been paying ASB more than your would have by being on floating, shorts? Nice one...
(Note to self: 12 +
(Note to self: 12 + 1 = 13)
http://www.ft.com/cms/s/0/d488b6dc-3062-11df-bc4a-00144feabdc0.h
http://www.ft.com/cms/s/0/d488b6dc-3062-11df-bc4a-00144feabdc0.html?ncli...
John Authers always is good to look at for logical reasoning
http://www.ft.com/cms/s/0/d488b6dc-3062-11df-bc4a-00144feabdc0.html?ncli...
his take on interest rates - and why they lift
@Josh: I can see OCR
@Josh: I can see OCR at 2% in 2025 and GST at 25%...
@shorts, its only a good
@shorts, its only a good buy if at the 5 year mark you paid less than I do staying floating....I suspect the odds might tip your way from year 3 on but Im not sure yet....so much carnage is possible in the next 2.
regards
Good informative article Bernard.
Good informative article Bernard.
NA - Floating rates don't
NA - Floating rates don't seem to have dropped below 6% until September/ October 09. http://www.interest.co.nz/charts/gallery7-40.asp
Paul - ASB's actual rate was 5.95% but the gave me 5bps discount to match Bank Direct's rate. Pure luck - but I like to take credit for being so awesome.
Traditionally for many decades now
Traditionally for many decades now NZ has been out out whack with the rest of the world
Our fixed has been lower than floating
Now its the other way around in sync with the rest of the world
The whole financial situation is in a state of flux and will be for some time to come..
So the question is will it stay in sync or not and IF it doesnt when will it go back????
Also traditionally in NZ floating has been approx 1/3 above the OCR....till now..
I would not like to predict what will happen of the term of a 4 or 5 yr fixed taken over now...
I would be watching the long term fixed...the long term ave (putting aside the Muldoon yrs) is around 8.5%...which is not far below now
So I would be going floating for now...then IF long term starts to trend up and a few other fundamentals (inflation, OCR, trends off shore, wholesale rates etc) show a significant rise, then fix.
If one fixes around the 8.5 long term and it falls, over the next 5 yrs you are likely to still be on the ave rate for that period anyway..a lot can happen in 5 yrs
At the end of the day at the moment it is like counting cards on the blackjack table...play the odds and the aces are still in the pack.
Say the OCR went back
Say the OCR went back up to 8%. That would take floating rates up to at least 11% given the extra funding costs. I think I'd rather fix now at 8.5% for peace of mind.
I think that's a really
I think that's a really brave call to make to people Bernard - you're effectively making a call on the inflation/deflation debate where a multitude of very smart minds reside on both sides of the argument - I've read The time is different as well, plus many others over the past 4-5 years and I understand fully both srguments
Fixing provides one thing, certainty - and when you can fix rates that are still on the historic low side, in an environment of such heightened uncertainty, that's a massive call to remain floating. Frankly, the state of the world is perlious and demands intense risk management rather than attempts to make out that someone knows what might happen - if the worst happens (i.e. say an inflation spike 1-3 years out) being floating will have been an undefendable dumb strategy when there were clearly other prudent options available at the time.
Wonder if fixind at 5.95
Wonder if fixind at 5.95 over 5 years was such a great move. We'll know for sure sometimes next year
Could someone please point out
Could someone please point out to me how you can have de-leveraging and rising interest rates in the same economic scenario?
Alen - it will be
Alen - it will be the best decision you every made
Mike M - there is no deleveraging going on - for every dollar the private sector deleverages, the public sector puts on two ! This is socialism, and not the creative destruction that capitalism would have provided to the system that would have engineered an earlier recovery - this ensure a very long haul for the biggest basket cases who are at the forefront of it.
Anyone who took 3 or
Anyone who took 3 or 5 years fixed this time last year is way better off then someone who remained floating - floating was still much higher until Sept/Oct.
The feeling of comfort being on 5.95% fixed for 5 years is better than floating at 5.59% and worrying that the float will increase to more than 7% within 12 months.
The 5 year fixers will be feeling very chuffed for most of the next 4 years and those that fixed for only 3 years will be wishing they had taken the 5 year option.
Huge numbers of people took these low rates - far more than you may think given the short term period that they were available.
@Frank: Indeed, peace of mind...its
@Frank: Indeed, peace of mind...its ppls own decision...
@Jack: Unless you fix now for a period (say 5 years) past a spike in 3 and assume its a spike and not something more intransient then you get caught the other side anyway. Hindsight is 20/20 as they say.
"there is no deleveraging going on – for every dollar the private sector deleverages, the public sector puts on two" Funny but everything I have read says the opposite ie huge de-leveraging, and the ratio is 10:1 at best 5:1 not 1:2 (got a URL?) ie $5 out privately is compensated by Govn's putting in $1 its not enough....so you will get your "creative destruction" IMHO..in which case an OCR in the pits for an extended time is likely...
Anyway the calculation/choice is, pay fixed at 8.5% for 5, or stay floating for the term and if you are in the position to, over-pay...I sat down a while back and worked out over that period at year 5 the floating would have to be over 10%...for me to pay more $ in that time....So what I have done is pay that 10% now so Im paying down capital every pay day...my mortgage is small but its made a difference it looks like Im at least a year early and Im trying to ramp that up even more.
@alen: If you got 5.95% for 5 years that was a good deal IMHO....those taking it probably picked very well, I wonder if some decision makers at banks got fingers smacked over that one.
@mikeM: all else being equal I'd agree that the idea of "de-leveraging and rising interest rates in the same economic scenario?" seems unusual, but we are in unusual times....Japan has had 2 decades of stag-flation...the world could have 2 decades at this rate....we have to borrow from somewhere at a rate dictated by the lender...unless we get deflation and a depression (my bet) I cant see retail rates staying here....the OCR could easily be <5% even <3% for a decade....but it seems to no longer matter......So Ive placed my bet on variable because I see a depression loomiing and Im just watching the Greatest Financial event ever (so far) unfold. Nothing else I can do and in the last 6~12 months nothing has made me change my mind.
regards
Steven, Japan was going to
Steven, Japan was going to be my example. They have had years of de-leveraging (and deflation) so interest rates essentially went nowhere. If this is the way ahead for the western world then a rising OCR globally would have be economic suicide.
Chuffed to be on a
Chuffed to be on a mortgage for 5 years? ........In 5 years I would have saved another 500k.......
Mortgage is only $100K. We
Mortgage is only $100K. We should have repaid that plus have another $100K in the bank by then. Not bad on 1 income, having just turned 30 with a 9 month old baby.
Last year anz/national had short
Last year anz/national had short fixed rates for 6 and 3 months around 5.3%. If someone used it, and then rolled onto float at 5.7% for most of this year, would be better off for this two year period. If rates stay low till end of the year and then fixed at around 7% over two years one would probably break even over 4 years period.
So, financially still better off by fixing on 5 years, but then, you are locked in for long period
Not worth the risk on
Not worth the risk on 1 income. But with only $100K it's not going to make a big difference either way.
To all On the question
To all
On the question of deflation vs inflation I reckon we will struggle to see inflation while capacity is still building in China and the banks are not lending while they deleverage.
High unemployment will keep the pressure down on prices. I thought for a while that all this money printing would spark hyperinflation, but I can see that much of that cash is now just sitting in central bank accounts unlent or is being pumped into government bonds.
Longer term interest rates are however likely to rise into the mid to high single digits as the funding pressures from all this government debt and lots of corporate debt has to be rolled in the next 3 to 5 years.
I still also think there's a big risk of another financial crisis triggered by events in Europe. The next one to watch is the British election in May.
cheers
Bernard
Slarty, I emailed Westpac to
Slarty,
I emailed Westpac to check whether what you'd heard were true. Here is their response.
Pete Sarantzouklis, Head of Retail Lending and Credit Cards, said:
"This is not true. We are proud of the fact that we are 'open for lending' and helping more people into purchasing their ideal home. This includes supporting 'above 80% of valuation lending' as currently advertised. There is no intention to change this."
cheers
Bernard
well I like what shorty
well I like what shorty says about fixing as inflation & probably hyperinflation due soon so fixing is the best for five years right now.
bank's delevraging Bernard means nothing if governments in particular US are using smoke & mirrors to print billions a day. you have until 31st March to sort out what you are going to do.
on that day US says it will stop quantivie easing (printing money by hitting compter button) which could start deflation quickly followed by high inflation/hyperinflation due to the amount of money in the system. US attempts to control this are limiited by the fact that most of the US dollars are now outside the US & they can't control them.
europe is about to collapse due to inflexability of euro & why we should never have a common currency with aussie.
You are right about the amount of debt here & aussie in real trouble as they have borrowed offshor as well big time. China due for big inflation & no one should rely on them being able to prop up aussie economy.
China only worry about their people as historically that is their greatest enemy. so they will do what they have to do for stability for their own economy.
economists are now seen as on a par with witch doctors as people start to head back to the only real money gold & silver (& platinum).
Europe & Britain there is big move in this direction in last few weeks & end of last year big moto vehicle dealers were seen to be asking for gold &U silver as deposits for vehicles in US. comment at the time was how long before they take that for whole vehicle or property.
History is about to repeat as this depression is about to really kick in.
To RobW For a number
To RobW
For a number of years Westpac have offered Capped Rate Loans. They used to have 1, 2 and 3 year Capped Rates but still now offer a Capped Rate for one year.
To BH Refreshing to see
To BH
Refreshing to see your making a prediciton based on some fact rather then everyones same old news and weather.....might even top Tony Alexanders "Fix now at 5.75%" that he has bleeted on about for months.....good to see you taking a little risk
Regards Average Joe
The first warning bell being
The first warning bell being rung?
http://www.stuff.co.nz/business/personal-finance/3512334/Interest-rate-h...
@shorts: Te He.. I also
@shorts: Te He.. I also got $500k fixed at 5.9% for 5 years in Feb 09. Bank Manager thought I was mad to fix at the time, because interest rates were going to fall to nothing.. - yeah right! I haven't told anyone till now, but I'm secretly quite pleased with myself.. Te He..
Shorts - that's awesome having
Shorts - that's awesome having such a low mortgage. Call me a cynic, but I'm guessing you live in Eketahuna or Kaponga?
Our first component of a
Our first component of a 30 year mortgage (a 2-year fixed term) is about to expire, and we are seriously considering moving the majority of the entire 290k mortgage to a revolving credit.
we fixed at the peak of the market with 9.5% for 2 years, the others being 9.4% and 9.3% for 3 and 4 years respectively.
My calculations show that in swapping to a revolving credit with the current 5.75% interest, our mortgage will be entirely paid off in 6 years. It is likely to save us hundreds of thousands of dollars.
I am as far from an economist as you can get, but it is becoming obvious that the nature of the rates has changed. Forecasting is difficult given the number of factors one has to consider. But being on a variable / revolving rate does mean that you can make changes at the last minute with minimal financial penalty.
When interest rates started to fall, I knew we should have broken the mortgage at that time (penalty was something like $3k). We left it too late. By the time we got serious about it, the banks had realised what was happening and break fees increased eight-fold.
For the $8k it will now cost us to break the other fixed mortgages we have, I think it is extremely cost-effective in the long run.
Fantastic article, Bernard!
Yeah Shorts - I'm with
Yeah Shorts - I'm with Jayne here, that is awesome. However, I'm keen to know how you can have a child when you obviously have no testicles.
How long do you spend
How long do you spend a day coming up with stuff like this?
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[...] Blogging On Interest Rates,
[...] Blogging On Interest Rates, Economics & Business in New Zealand [...]
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