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What to do now long term mortgage rates are rising

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  • outspoken
    replied
    But when no-one wants to borrow it because they are already up to their eyeballs in debt or the banks just wont lend it out on favourable enough terms or you dont meet their criteria, then, they just give it out. Like Rudds $1000 cash payments in Aus, or free home grants, or helicopter bens idea of flying around with money spilling from the craft. lol, what a joke.
    Problem is though, this free money still has to be paid back + interest. This comes down the track in increased taxes, utility bills, increased stealth taxes.

    Leave a comment:


  • Badger
    replied
    Originally posted by Green Fish View Post
    I can understand how printing more NZDs will cause inflation, but what is the mechanism? For example, if the Reserve Bank decides to print a further billion dollars of NZ currency, how does it get this new money out of the vault and into the economy?
    Outspoken is correct, and then your into bonds and treasuries area. NZ has Uradashi and Kauri bond issuances...

    Banks can also pyramid new or more thin air money on top of individuals savings so $10,000 turns magically into $90,000 which is then loaned out + interest.

    Heres the good bit, With out *growth* theres no way to pay off the new money created from nothing + the interest...

    This is why central banks often mention they keep inflation around 3% target.Thats a 3% increase yoy. This is the stealth tax part of inflation.
    Connecting the dots - this is why politicians and economists always blab on about more growth, to keep the game going...

    Leave a comment:


  • outspoken
    replied
    Originally posted by Green Fish View Post
    I can understand how printing more NZDs will cause inflation, but what is the mechanism? For example, if the Reserve Bank decides to print a further billion dollars of NZ currency, how does it get this new money out of the vault and into the economy?
    In very simple layman's terms, the central bank creates new money out of thin air. It then uses this money to buy what is essentially an IOU, usually from the government. This money is credited to the bank account of the seller of the IOU. The bank can then use this money as a basis for creating more new money by increased lending.

    so, greenfish, to answer your question: it gets lent out, has to be paid back + interest, or defaulted on.

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  • Bob Kane
    replied
    I'm surprised that Badger & Co haven't leapt into action by now and given us the answer.
    Apparently the 'bankers' just click their fingers and the money appears out of fresh air.
    These 'bankers' (there's five of them) live beneath the Swiss Alps but sometimes live in New York.
    They've been controlling the world's financial system for the last 500 years but don't feel too threatened by them, our Badger has got their measure and he's not playing their game any more.

    Leave a comment:


  • Green Fish
    replied
    How does a country "print more money"?

    I can understand how printing more NZDs will cause inflation, but what is the mechanism? For example, if the Reserve Bank decides to print a further billion dollars of NZ currency, how does it get this new money out of the vault and into the economy?

    Leave a comment:


  • Munga
    replied
    Don't Panic About Rates

    Here is John Bolton's blog on http://www.squirrel.co.nz/?p=405 posted on 26 March (interest rates mentioned changed the following day this was posted).

    STOP, BREATH DEEPLY, THINK. If you haven’t fixed yet … don’t panic. Even with a 5 year rate at 7.20% the world won’t topple over tomorrow!
    Us Kiwis are an inherently conservative bunch and probably still recovering from when rates were over 9.00% only six months ago!

    Interest rate cycles take up to 7 years and the Reserve Bank only kicked this one off six months ago. We are in the middle of a major recession so the Reserve Bank is hardly going to start increasing rates anytime soon. If anything the economy seems to be getting worse, not better.

    There are some fundamental reasons why long-term rates will track up mostly to do with inflation and bank funding costs. That said, I think we are seeing way more than that at the moment. Simple Supply and Demand. As more homeowners rush in to lock for 5 years the interest rates will go up. The reason is that banks will struggle to find investors prepared to pick up the other side and invest in 5 year fixed rates. We mentioned that this would happen in our blog Long Term Rates have Bottomed back in mid February.

    Short-term rates are not going up. You can expect Variable, 6 Month and 1 Year Rates to stay low. The pivot point appears to be the 2 year rate which is hanging around 5.95%.

    See the latest wholesale 90 day rates here http://www.interest.co.nz/charts/gallery7-10.asp

    The long-term rates will stop going up when the market finds its equilibrium. With spooked homeowners fueling demand for 5 year fixed, the rates could go up a bit further, especially as everyone dives in. Remember that everyone went into variable rates over the past 3-4 months and are now jumping back into fixed. That’s about $10 billion of home loans diving into longer-term fixed rates when there are few investors.

    You have to ask yourself, is the new equilibrium good value?

    I was ok with a 5 year rate up to 6.50%-6.75%, but in my mind anything over 7.00% in the midst of a major recession isn’t great value. I’d rather get a few years of shorter term rates with 5’s in-front of them. Don’t get me wrong - I intend to fix for 5 years but not until a true economic recovery is underway. I wouldn’t advocate this if you are the nervous type - not worth the stress! If rates keep you awake at night then lock in now and add a few years to your life.

    The Reserve Bank is highly likely to drop the Official Cash Rate again next month - and I’m picking another 0.50%. I also expect the Governor to put the banks under a bit of pressure to pass it on. The 90 Day Bank Bill is sitting around 3.00^ish so at 5.95%-6.20% banks are already carrying close to 3.00% margins against historic averages of around 1.30%. My view is that that is enough fat to cover their higher funding costs.

    Long-term higher inflation will be a global issue … but I struggle to see where it will come from domestically. From what I can see kiwis are banking their interest savings and not spending it and our Government seems to be running out of money!

    Struggling to Sleep?
    If you are struggling to sleep, or live on a pretty tight budget, then our view has always been to fix long. Another option could be to consider 2-3 year rates at around 5.95%. That will at least give you some piece of mind for the next few years and is fairly good value. The 5 year rate, even at 7.20% probably isn’t that bad but not my choice. If you are of a conservative nature then don’t feel too guilty putting some into the 5 year, but always split it with another term to reduce your risk.

    It really comes down to a classic trade-off between risk and return and everyone will have a different appetite. I’m prepared to stay in short-term rates for a cash flow benefit now. Others will want the certainty of longer-term rates. Or you could sit on the fence and do a bit of both (just not a picket fence!)
    Last edited by Munga; 29-03-2009, 01:13 PM.

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  • CJ
    replied
    Originally posted by Munga View Post
    Why would they do that?
    ??? Because that is what they had to offer to get the cash that they need.

    Either they are expecting the wholesale rate to drop or mortgage rates to increase. The article had them quoted as saying they have multiple sources of funding so you couldn't read in a corresponding increase in mortgage rates. I am skeptical.

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  • dandan
    replied
    Originally posted by Munga View Post
    Why would they do that?
    Could be to keep customers

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  • Munga
    replied
    Originally posted by CJ View Post
    ANZ just raised US$1B with a 250point premium to wholesale for 3 years. That means they are paying 7.2% currently and offering it at lower than that for 3 years .(ie. they will be making a loss).
    Why would they do that?

    Leave a comment:


  • CJ
    replied
    Originally posted by Munga View Post
    I may be grasping at straws here but look at what was in today's Dominion Post (Page A2, second column, under the heading Tax boost may be last for a while). Just one little paragraph:

    Yesterday, the Reserve Bank lowered the price it charges banks to guarantee their overseas borrowing – a move that could help counter rising long-term rates.

    How much difference could this move by the RB make?
    ANZ just raised US$1B with a 250point premium to wholesale for 3 years. That means they are paying 7.2% currently and offering it at lower than that for 3 years (ie. they will be making a loss). Before the current crisis, the risk premium (currently 250 points which includes 70 points for the government guarantee) was less than 100points.

    Leave a comment:


  • Munga
    replied
    I may be grasping at straws here but look at what was in today's Dominion Post (Page A2, second column, under the heading Tax boost may be last for a while). Just one little paragraph:

    Yesterday, the Reserve Bank lowered the price it charges banks to guarantee their overseas borrowing – a move that could help counter rising long-term rates.



    How much difference could this move by the RB make?

    Leave a comment:


  • VincyV
    replied
    Deflation before inflation

    I am still betting that interest rates will drop again before they shoot up.

    The reason the banks are having to pay more is artificial--inernationally finance is being hoarded to improve balance sheets.

    But the market overal is deflaationary still--meaning tending towards lower interest rates.

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  • essence
    replied
    If I was Alan I'd drop the OCR to 2% on Monday.
    Wouldn't that be nice. So long at the drop is passed on to the general public - which it won't be.

    Unfortunately, with the Bank's tightening lending criteria, investors are being a lot more cautious, mortgage holders will go to the lower rates (if they get the chance without too much break fees) and any "extra" money from the re-fixed mortgages are going to pay down those mortgages faster.

    Joe Public is NOT spending, he's reducing debt or not buying. This is NOT what John Key and the economists want.

    One way to get the economy moving again, is to get the Bank's to lift the amount the investors/homeowners can borrow from 70% to 80%. Ppl don't have 30% deposits sitting in the Banks.

    Banks are being paranoid and rightly so. They were the idiots that started this whole fiasco by lending to everybody who could breathe. Now it's come back to bite them HARD, so they're being over-cautious.

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  • dandan
    replied
    My guess is that the reserve bank for some reason didn't notice 5 year swap rates going up and were too busy looking at australia putting a hold on their ocr. The RB wanted to play watch and see, but now, on the verge of potential recovery, isn't the time for watch and see.
    The RB expected banks to lower their rates in line with the .5% cut but seemed supprised to find that most banks had already factored it in. The economy in its current recessive state needs money from home owners to be spent as cash injections for self owned small business and general retail spending. By the RB not dropping the ocr by 1% and suggesting a .5-1% future drop they have allowed 5 years and other long term rates to rise damatically. The effect of 7.5% retail 5years rates which look like they are goping to rise further, is that home owners coming out of 7.5% rates from a few years ago are panicing and fixing at the same rate or even worse, paying break costs and fixing at the same rate.
    Tony alexander was saying 5.5% five year rates in winter a few weeks ago and now says fix now with a spread of 3, 5 and 7 years.
    The result is less money in the household and therefore more economic contraction.
    Rising 5 year rates is and massive massive massive problem for the NZ economy at this point in time.
    Word is that the wholesale rate rise is from money printing overseas and debt repayment forecasts, could be a fear induced spike and I think it might be.
    If I was Alan I'd drop the OCR to 2% on Monday.
    Last edited by dandan; 28-03-2009, 09:30 AM.

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  • Bob Kane
    replied
    I think the banks have seen the stampede into 5 years fixed and have tacked 1% to the increase because they can - 'If the demand is high then let's make some money...'
    After all, have you ever heard of a banker who turned down the chance to make a profit?

    Leave a comment:

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