Tony's latest prediction regarding interest rates.
If I Were a Borrower What Would I Do?
And so now we start to get into the really interesting part of the interest rate cycle. It is all about trying to pick
when fixed borrowing costs are going to be at their lowest. If we knew ahead of time when this was going to
happen - let's say in May next year - then one would either fix six months or take a floating interest-rate and
lock in for a five or seven year period come May. But then maybe the low point will be reached in March. Or
maybe it won't come until September next year.
There is considerable uncertainty about when the low point of the interest-rate cycle will be reached. But it
may not really matter because from an interest rate management point of view at the moment whether one
believes the low point will be in January, March, May, or September the answer of what to do is largely the
same. Take a fixed rate for six months. If we later on believe the low point is going to be reached before the
six months is up then the cost of breaking that six months term will be minimal. If we decide the low point
has probably not been reached in six months time then one can either fix for another six months or perhaps
by then the floating rates will be substantially lower. Almost certainly the short-term fixed rates will be lower
than the floating rate.
So if I were borrowing at the moment I would fix for six months. I would also be very wary of anybody daring
to make any strong statement about when the low point per interest rates will occur let alone at what levels.
There is still massive uncertainty about the world economy over 2009 and all one can say is that the worse it
gets overseas the better it gets for somebody who is borrowing - but only in terms of the interest rate they
will pay and perhaps the price of the house if our prices fall further than we are thinking. Because if things
get really really bad overseas then the unemployment rate in New Zealand will rise much higher than the 6%
or so we think could be the peak late next year.
And so now we start to get into the really interesting part of the interest rate cycle. It is all about trying to pick
when fixed borrowing costs are going to be at their lowest. If we knew ahead of time when this was going to
happen - let's say in May next year - then one would either fix six months or take a floating interest-rate and
lock in for a five or seven year period come May. But then maybe the low point will be reached in March. Or
maybe it won't come until September next year.
There is considerable uncertainty about when the low point of the interest-rate cycle will be reached. But it
may not really matter because from an interest rate management point of view at the moment whether one
believes the low point will be in January, March, May, or September the answer of what to do is largely the
same. Take a fixed rate for six months. If we later on believe the low point is going to be reached before the
six months is up then the cost of breaking that six months term will be minimal. If we decide the low point
has probably not been reached in six months time then one can either fix for another six months or perhaps
by then the floating rates will be substantially lower. Almost certainly the short-term fixed rates will be lower
than the floating rate.
So if I were borrowing at the moment I would fix for six months. I would also be very wary of anybody daring
to make any strong statement about when the low point per interest rates will occur let alone at what levels.
There is still massive uncertainty about the world economy over 2009 and all one can say is that the worse it
gets overseas the better it gets for somebody who is borrowing - but only in terms of the interest rate they
will pay and perhaps the price of the house if our prices fall further than we are thinking. Because if things
get really really bad overseas then the unemployment rate in New Zealand will rise much higher than the 6%
or so we think could be the peak late next year.
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