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  • Originally posted by Gerrard
    Ok, so it's now the whole lot at once, but there may still be a good chunk of it that comes up for renewal at a time when rates are near a peak. How do you handle that?

    Thanks
    Gerrard
    I normally have a excell graph showing my loan spread. Every time one comes up I am aware a couple of months out. I assess market and rates then if need be secure a rate early which will fit into a gap of my graph.
    This is what I just did other day with NAB prior to there latest rise. Loan does not come off fix till sept but I have locked in rate for when it comes up.

    Comment


    • Gerrard,

      I would have thought that the strategy works by fixing each portion for 5 years once the original term expires. So when the one year portion expires, you fix it for five years. Then you have the original two year portion with one year remaining, the three year portion with two years remaining, through to the new five year portion.

      But I could be wrong - I'm not familiar with Keiran's exact strategy.

      Paul.

      Comment


      • Ok here is the relevant info from the article Kieran wrote
        At the end of each 12 month period $100,000 of debt will expire from it’s fixed interest rate. So each year you will only need to make a judgments call on whether to float or fix that $100,000. This is a much more manageable decision to make rather than deciding whether to fix or float the total loan amount.
        Full article available here
        http://www.hybridgroup.co.nz/MarketI...il.aspx?id=604
        Really the term you choose is up to you.

        Comment


        • At the end of each 12 month period $100,000 of debt will expire from it’s fixed interest rate. So each year you will only need to make a judgments call on whether to float or fix that $100,000. This is a much more manageable decision to make rather than deciding whether to fix or float the total loan amount.
          Thanks Whitt - must have forgotten that frm when I originally saw the article.

          So that means interest rate averaging is only a "short" term strategy when you first buy the property. In the longer term you make a decision on a case by case basis at the time that chunk matures, which means you may well make decisions that come back to bite you (or work in your favour) another few years down the track.

          So interest rate averaging doesn't necessarily solve the problem across the whole lifecycle of ownership.

          Paul - Refixing each chunk for 5 years could be a good plan, but I guess there will be times where the 5 year rate is just plain unattractive.

          Gerrard

          Comment


          • It does not really matter how you spread the loans. The important thing is to do it!!
            Remember the whole aim is to minimise risk of a large portion of your loans coming off term when rates may be high.
            Providing you spread them how you do it is irrelevant.

            Comment


            • Thanks for your comments and questions about IRA (Interest Rate Averaging). Yes, it's not an exact science but certainly better than guessing in my opinion.

              Gerrard, Yes I understand that if you instigate IRA by splitting your mortgage into 6 equal amounts then after each fixed term expires you could just refix every loan for 5 years and eventually 5/6 of your total debt would be on 5 yr fixed rates (thats not ideal in my opinion).

              But most investors with a large debt exposure will continue to increase their property portfolio over time and therefore giving the opportunity to fix any 'new debt' for terms that will 'even' out the risk of too much debt exposed to floating rates at any one time.

              However even if you take on no more debt you still have the option of whether to 'weight' your fixed rates more towards the long term or more towards the short.
              Let me explain a bit further to help you understand my take on this.

              I have never had a 'perfect' mix with exactly 1/6th of debt in each 'fixed time band' BUT I have had a fairly even 'spread' of fixed rate expiry dates and been able to make regular manageable choices about whether I will refix expiring interest rate terms for shorter or longer terms.

              I do tend to consider the interest rate cycle too... The interest rate cycle I refer to is the fact that interest rates tend to trend up or down for a few years at a time. It is a relatively short cycle and gives a good indication of whether you should 'weight' your fixed rate debt longer term (ie 3,4 and 5 yrs) or shorter term (i.e. 1-2 yrs).

              When deciding how long to refix, expiring fixed rate debt, for my strategy has been to consider roughly where we are in the interest rate cycle;

              When the interest rate cycle is in its upward trend then 'weight' your fixed interest rate debt more to the longer term BUT if the interest rate cycle is in its downward trend then 'weight' your fixed interest rate debt more to the short term.

              The last few years we have seen an upward trend hence I have been refixing longer term for the last few years so now I have more debt fixed longer than shorter which I am very happy with!

              The net effect is that my overall average interest rate has only slowly increased over the last 2 years giving me certainty of cashflow irrespective of interest rate rises PLUS in the event of further interest rate increases I am well insulated against them.

              My ultimate goal using IRA is to ensure I am well positioned to be countercyclical if (or when) there is an interest rate spike and many people are trying to exit property ownership all at the same time...
              Kieran Trass

              Comment


              • Hi Kieran, great strategy, but if you for some reason wanted to sell the property would you not be hit with multiple break fees from the lender?

                Or do you believe the benefits outweigh these potential costs?

                Comment


                • Home loan rates on rise
                  20 July 2006
                  By JAMES WEIR

                  Borrowing to buy a home is getting more expensive, on top of record fuel prices and inflation at a five-year high.

                  ANZ National Bank will increase fixed-term mortgage rates sharply today and the other big banks are expected to follow within a few days.

                  The popular two-year rate at the ANZ, the biggest bank, will move from 8 per cent to 8.3 per cent – equal to peak levels of late last year.

                  Fixed terms – from one year through to five years – make up about three-quarters of all home lending.

                  Fixed-term rates above 8 per cent are expected to "scare people a bit" when they look at the cost of borrowing for a home, an economist says.

                  Westpac, BNZ and ASB Bank all say they are reviewing rates.

                  For a $100,000 loan, the rise in the two-year, rate would bump up fortnightly repayments by about $8 to $448.

                  AdvertisementAdvertisementFor customers who borrowed about two years ago and are now re-fixing, rates will jump from about 7.5 per cent to about 8.3 per cent, adding about $21 to fortnightly repayments.

                  The interest-rate rises follow a jump in fuel prices this week to a record $1.77 a litre, raising fears that drivers could soon pay close to $2 a litre.

                  The two factors will suck money out of other spending, economists say. Shop sales are expected to barely grow in coming months.

                  Bank lending rates are rising because it is costing banks more to borrow in the wholesale market. Rates in that market are increasing in part because inflation has risen to 4 per cent – higher than expected – and interest rates overseas are up.

                  Bank of New Zealand chief economist Tony Alexander said mortgage rates above 8 per cent tended to scare people a little.

                  For people coming off rates set as low as 7.5 per cent two years ago, the new rates would be a shock.

                  "It will contribute to a very long-overdue dampening of the housing market," he said.

                  House prices were clearly overvalued when so many people could not afford a first home.

                  Prices were expected to flatten out for three to four years, with a small chance of their dipping, he said.

                  http://www.stuff.co.nz/stuff/0,2106,3737304a13,00.html
                  "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

                  Comment


                  • Hi Guys

                    Westpac have followed the rest with increases starting Monday.

                    Just like Mary had a little lamb.
                    Where one goes, the rest are sure to follow.

                    Regards
                    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

                    Comment


                    • Hi Kieran, great strategy, but if you for some reason wanted to sell the property would you not be hit with multiple break fees from the lender?

                      Or do you believe the benefits outweigh these potential costs?
                      Thanks Tim,

                      Remember IRA is all about minimising risk , not necessarily getting the cheapest cost...

                      So yes it can sometimes mean 'break fees' or ERP (Early Repayment Penalty) but that's a cost I am happy to bear upon the sale of property (I have never sold for a loss so to me any break costs has just been part of the cost of doing business).

                      Generally if interest rates have increased since you fixed and you break your fixed rate early most banks will not penalise you (ie because they can re-lend that money to someone else at a higher rate than you were paying!).

                      However if you are paying a higher rate than the bank can get by re-lending that money out to someone else then they will sting you with a penalty.
                      Kieran Trass

                      Comment


                      • My own limited research has been that "on average" borrowers on variable rates have done better than most since the new monetary policy environment started.

                        That has changed in the last two years due to a fundamental pricing policy change with the 1st tier lenders. Banks now take a much larger profit margin on variable rate debt than they used to (at least for retail borrowers), around an extra 0.50% on average from what I can see. This, combined with the inverse yield curve is balancing out the figures significantly.

                        At the end of the day splitting fixed rates is about spreading risk rather than trying to beat the game.

                        Comment


                        • Hi Guys

                          Well what do you know... interest rates are dropping

                          ASB and Bank Direct have dropped some of their rates as of today.

                          ASB
                          1yr 8.4%
                          2yr 8.1%
                          3yr 7.95%
                          4yr 7.85%
                          5yr 7.75%

                          Bank Direct
                          1yr 8.2%
                          2yr 7.95%
                          3yr 7.8%
                          5yr 7.65%

                          Regards
                          "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

                          Comment


                          • Originally posted by muppet
                            Hi Guys

                            Well what do you know... interest rates are dropping

                            ASB and Bank Direct have dropped some of their rates as of today.
                            Regards
                            Make that BNZ now too.

                            Comment


                            • Interesting……

                              What do you think is the motivator?

                              The banks just got access to some less expensive money to loan out….

                              Or they are dropping their “per customer margin” in the hope that they gain enough customers to get an “overall margin” increase….due to increased quantity…

                              Let me just check who is issuing what debt bonds internationally…

                              Comment


                              • back again...


                                Summit is up...
                                from what I can tell with just a quick look ...it seems that there is only one third as much money being put into debt bonds by the Japanese and the Europeans...hmmm...what am I missing.

                                Comment

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