Interest Rates

[Damap]

Whilst your approach is without doubt the "smartest" Ross I do unbelievably agree with IWIK on this one. When rates re this low just fix as long as you can and forget about it.

[Rosco]

The spread approach is the way I currently handle things..

I guess what I am suggesting though is, if you lock in at 1 year at say 4.3% and...
1. rates start going up - break the mortgage at likely no cost as the bank would prefer you were on a higher rate rather than a lower rate
2. rates continue to drop - either wait out the year, or potentially break at, i am guessing no cost as the 2 year+ rates would likely not be lower than the 4.3% rate you secured for 1 year.

1. Rates start going up - at this point you are too late, and the long term rates will have already increased.

Ross

[Rosco]

Agree fixing for 5 years at 5% isn't bad, and that would be my second option.

But still need to think about effect of all loans coming up at once. If you had a 3 year and 5 year for example, in 3 years time you might be able to fix for 5 years at a low rate, but by 5th year, that could be a lot higher.

With banks it's very easy to have multiple loans!

Ross

[Damap]

Yes agree about that to spread the maturity dates but that is only if you have enough loans. I learned a few years ago that every time I tried to be "clever" about cycles/currencies/interest rates etc. I nearly always got it wrong. So now I apply the KISS principle. You can be P and I on 5% money in Auckland and be cash neutral so just do it I say!

[ithink]

I guess the point that Half was trying to make has been forgotten, has it?

The point Half was that if you fix for 6 months you not only get the best rates but are also in control of the situation at all times, whether the rate is going up or down...!

My only comment to fixing short term would be that you would have to be very good at reading the trend and where the rates are going and there is a good chance that things change dramatically in 6 months - like they did in 2008-2009.

For me personally, with a loan lets say 500K, the best spread is something like this:

Floating - 20K
6 months - 200K
5 years - 280K

The big chunk in the 6 months allows me to spread the risk as well as get enough flexibility to be able to respond to market changes. That short term loan, if market remains steady will always be kept for short term too (minus a new small floating portion) with the intention of being able to pay it off asap.

Does that make sense..? ROSCO??

[Rosco]

Hi ithink,

Your best spread is very similar to mine. You have split into 2 and spread long and short term. I split in 3, so slightly more conservative possibly.

I personally don't think interest rates are going to go down much more (floating might, but not fixed rates), so I would go longer than 6 months. But many investors think the opposite, so you might be right and only time will tell.

Note as I put above, once the market changes it is to late to respond!

Ross

[Rosco]

Yes agree about that to spread the maturity dates but that is only if you have enough loans. I learned a few years ago that every time I tried to be "clever" about cycles/currencies/interest rates etc. I nearly always got it wrong. So now I apply the KISS principle. You can be P and I on 5% money in Auckland and be cash neutral so just do it I say!

agree completely with the not trying to be 'clever comment. I prefer to get a good rate that I'm happy with and go with that. I also generally never swap and change too much, as it is too much hassle and often for little gain.

Ross

[Bluekiwi]

..
If you fixed right now and tomorrow rates started rising how far would they go up in 6 months?
Sure you might not get in at the lowest (for a 5 year fix) but you won't be in at the highest either.

Also 6 months gives enough lag to be able to see that the rise is really a long term trend not another blip that you regret shortly.

You also have the ability to lock in a longer rate up to 3 months in advance I think.
So going 6 month rates is quite safe.

Looking back, if I had understood this principle I could have been ahead 100k to 200k me thinks.

[andyp2010]

Yep I'd agree with Damap, because they're historically extremely low, it makes far more sense to assume they'll eventually average back to 7% or something and take advantage of unbelievable security and great cashflow for the next 3-5 years while we can, 1 or 2 years doesn't seem to make sense right now to me.

If they were above 7% it would make sense to go for much shorter terms.

Surely as a man of numbers and averages, that approach would make sense Ross?

[Rosco]

How certain are you they will go up?

What if they go down for next 2-3 year? This is what most people expect, and most people I talk to, and most bankers are trying to get 1 year rates as it is the best rate. I spend a lot of time trying to get investors to look at longer term rates!

Look at the Reserve Bank predictions for the last few years, and they are all wrong. If the RB can't predict it right, how can you?

So 1/3rd (or 1/2 is a similar approach) for 1 year - If interest rates go down, then you get lower rates in 1 year. If the longer term rates stay down or go down, then you maybe able to get better long term rates.

1/3rd (or 1/2) for 5 years - if interest rates go up, then have some long term protection.

I don't have the perfect answer, and I don't think anyone has, that is why spreading, spreads your risk.

Example
- fix for 5 years at 5%
- vs
Fix 1 at 4.3%
Fix 2nd at 4%
Fix 3rd at 4.8%
Fix 4th at 5.7%
Fix 5th at 6.2%

Both would cost the same over 5 years. But by having the lower interest at the start, you would the opportunity to pay down more principal (might be on personal home), and therefore less interest in later years as less debt.

So going 1 year gets the best rate, and possibly the best result over 5 years. But I also wouldn't want to gamble all my debt on 1 year, as too risky for me!

Spreading gives 4.62% as per my example. Costs about .3% more than fixed for one year. But also saves about .4% compared to 5 year rate. It gives a combination of risk and low rate, with some long term protection.

Ross

[Judge]

Like you Judge getting it right is impossible to accurately predict. I am very happy putting everything on 5 years at under 5%. I just can't see how that can go badly for me. Floating or short term money can expose you to an economic shock. I don't know how fast rates could rise but i would rather not find out on my own mortgages :-).

For myself I call a trategy of just locking for long term "to be safe" a "Lazy Strategy" after i have myself been lazy and did not want to bother with following rates and locked most of my loans at 7.5% for 5 years exactly 5 years ago. I have been paying 9+% rates over a very long period having fixed for 3, 4 and 5 years at the start of GFC (when no one knew which way the rates were going to head). So when i had a chance to lock at 7.5%, i thought, this was a good deal. Much better than the 9% i was paying. So i just locked for 5 years most of my loans again (obviously i have not learned the lesson the first time around). I thought i could not go too wrong. When the rates started trending down, and i started calculating how much money i was overpaying (which was a lot), i decided that in the future i will not lock just because the rate appears good on the day comparing to what i paid the day before. There is simply too much money at stake. Locking now at 5% or under would be a great deal comparing to my previous experiences. But if in a year's time i can lock at 4.5% or 4% for 5 years, i would be very unhappy. Managing rates, negotiating with the bank following the press and forming a view on where rates are going to head requires a lot of time and effort, but there is a payoff at the end of the day if you get it right (and cost if you get it wrong, of course).

Just another personal example since i am telling my life story here... This current cycle or rate reductions started (for me anyway) when Kiwibank introduced its market leading rate of 5.99% for 5 years about 6 months ago or a bit more. It was the only bank to give this rate when all other banks where at 6.5%. I immediately decided to snatch a bargain, went to Kiwibank, and locked for 5 years at that rate, and was very happy with myself. The rest is history... Now i can fix for 5 years at under 4.99%. Depending on one's loan size, 100 points can be a hell of a lot of money. Not to mention the cashbacks that became widely available soon after the price war started. Luckily i realised fast enough that locking was a bad idea and broke the loan for only $800 break fee. have been floating since them and counting my blessings.

So, for me, the moral of the story is no to look back when i look at rates. But rather look forward. What you save today is only part of the story. The savings that you may not be able to tap into in the future is an equally important part of the story, for me personally anyway. But everyone has their own strategy of course and i maybe proven wrong. Time will tell.

[Judge]

How certain are you they will go up?

What if they go down for next 2-3 year? This is what most people expect, and most people I talk to, and most bankers are trying to get 1 year rates as it is the best rate. I spend a lot of time trying to get investors to look at longer term rates!

Ross

Thanks Ross, exactly the point i make in a thread i started on the topic of whether this change is a cyclical one or structural. The assumption that we are just continuing in the same cycle that we experienced in previous years needs to be challenged. What if there is no more cycle?

http://www.propertytalk.com/forum/showthread.php?38750-Cyclical-v-Structural-change&p=379429#post379429

[Judge]

1. Rates start going up - at this point you are too late, and the long term rates will have already increased.

Ross

What if you monitor the long term rates and take action as the long term rates start to move?

[Rosco]

My experience is that you miss the boat.

What increase indicates it is the start of the long term rates going up? So if 5 year rates go from 5.3% to 5.4% tomorrow, do you suddenly break your short term rates and fix for 5 years. Or do you wait a few months to see what happens?

Unless you are really watching, I think you miss. And even if you are watching hard, it is very hard to pick the bottom of any trend and you would be torn between the low current rates and possibly higher long term rates.

Ross

[Rosco]

Just another personal example since i am telling my life story here... This current cycle or rate reductions started (for me anyway) when Kiwibank introduced its market leading rate of 5.99% for 5 years about 6 months ago or a bit more. It was the only bank to give this rate when all other banks where at 6.5%. I immediately decided to snatch a bargain, went to Kiwibank, and locked for 5 years at that rate, and was very happy with myself. The rest is history... Now i can fix for 5 years at under 4.99%. Depending on one's loan size, 100 points can be a hell of a lot of money. Not to mention the cashbacks that became widely available soon after the price war started. Luckily i realised fast enough that locking was a bad idea and broke the loan for only $800 break fee. have been floating since them and counting my blessings.
.

Hi Judge,

Just wanted to comment on the floating part.

Say 1 year ago you had $1 million loan that you moved to floating and still floating.

On standard interest.co.nz floating rates, you would have been paying about 6.25% (yes you probably have a discount, but you can also get discounts of the other rates too)

If you had fixed 1 year ago for 6 months or 12 months, then interest rate probably would have been 5% or less.

So if you had floated a reasonable loan amount for a year, you could have paid $12,500 more than you needed to!

So if you really wanted to stay floating, I would look at 6 month terms instead as basically the same thing, but at a much lower interest rate.

Ross