Interest rates: up or down

[casacamo]

We are needing to rollover a fixed interest loan currently 7.3% We are thinking to go for a longer term ie: 5 yrs at 8.5% - is this wise or should we stick with 2 yrs at 8.9%
in the hope that they will be a lot lower after 2 yrs.

[muppet]

Hi Casacamo

Here is Tony Alexander's latest take on interest rates from his Thursday's email newsletter.

If I Were a Borrower What Would I Do?
First of all I would have no hope that we will be seeing below average interest rates again for a long period
of time. However with United States monetary policy likely to be eased from later this year there may be
some downward pressure on medium to long-term fixed interest rates. That means I would be averse to
locking in for a term of three years or beyond at the moment. Fixing two years is a possibility and the
majority of people appear to favour that term still. But I personally would be willing to take a bit of a punt and
fix one-year looking to get a better but probably still short term fixed interest rate in a year’s time.

Regards

[Volatile]

according to a currency trader i know, NZ is looking down the barrel of 12% interest rates (in his opinion where interested need to be)

[xris]

This is a dilemna to be faced by many of us now and in the near future.

A jump from the 7.0-7.5% up to 8.5-9.5% range will be very difficult for a lot of people.

In many cases I really do believe it will be a matter of putting up the storm shutters and trying desperately to hang on for dear life.

What to do? The age old problem arises of trying to guess the future and of listening to and sometimes worrying about or being elated about other people's guesses.

The established guideline springs to mind - work out what the most you can afford is, and then fix for as long as possible. I am not necessarily suggesting that at the moment but there is some logic to it. If you have worked out what you can afford, planned for it, and then fixed for a longish time, you will at least be able to sleep at night. You may later find yourself paying more than the going rate, but I believe that is far preferable to having to beg borrow and steal for each successive monthly or fortnightly loan repayment.

The biggest worry of course is for those people who do do this planning exercise and find that the absolute most they can afford is 0.5% below the lowest rate available. That is where some lateral thinking and some soul searching will be needed. It will also be where some rich pickings will be found.

xris

[Keys]

This is a dilemna to be faced by many of us now and in the near future.

Then you get those of us who habitually fix for 5 years (me). I have several loans and they mature over a staggered time frame. Cost averaging over all of the loans is a stratagy which some favour.

If you have enough equity then you never need to pay a loan off. Just transferr the security to a different house.

I'm sure that most of us (as is evidenced by the polls) have enough equity to sell a house and still keep the loans secured over the remainder.


Keys

[xris]

I'm sure that most of us (as is evidenced by the polls) have enough equity to sell a house and still keep the loans secured over the remainder.


Keys

Yes, I believe this will be what a lot of people will do.

[Glenn]

Sometimes I have the feeling that the bankers are better at predicting the future interest rates than me.
Surprise surprise.
Have you noticed that the worst deal (in hind sight) always seems to be the best deal at the time you fix.

In other words the lowest rate ie

5 yrs at 8.5% - is this wise or should we stick with 2 yrs at 8.9%

7 years after one of my worst stuff ups I am still kicking myself for fixing 5 years at something like 9% to find 12 months later the rates were 7% or less. I paid $5000 to break the fixed term which paid for itself after only 12 months. So perhaps the worst deal you can do at the moment will be what looks like the best (lowest rate) today.

There now I have got myself all confused as to what is best. I have been doing what all the experts say is bad for the last couple of years with a fair percentage of my mortgages on floating. As the rates have gone up I have paid lumps off the mortgages and the net amount of interest I pay has gone down.
As a landlord I do not like people telling me what I should do and being at their mercy. The whole thing is a mind set. Be like a cat and not like a dog.

[nakizone]

Glenn,
You may be ‘consoled’ with respect to the interest rate dilemma by an interesting post by David McEwen (GJB6) only last week where he revealed extracts from a book by Max Gunther called ‘The Zurich Axioms - Investment Secrets of the Swiss Bankers’. I too have read this book.

Relevant quotes:

Fourth Major Axiom - On Forecasts
Human behaviour cannot be predicted. Distrust anyone who claims to know the future. More often than not, listening to prophets and tipsters turns out to be a mistake. You can't profit from prophets.
Fifth Major Axiom - On Patterns
Chaos is not dangerous till it begins to look orderly. Beware of unit trusts and fund managers, who analyse everything. They promise to find order which isn't there, selling only the illusion of order. Trust least those who find most order. …..


……A hunch can be trusted if it can be explained. Some will scorn hunches. Some will always follow them. The best approach is in between. Learn to use them discriminately, if you can…..

……..Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic. Beware of optimism in risky things – it is a dangerous state of mind. You feel that the best result will happen.

Tenth major Axiom - On Consenus
Disregard the majority opinion. It is probably wrong. Don't just follow the crowd. Think things through for yourself first. Beware of "experts" (there is always another "expert" who will disagree).

At this point I am unable to add the link

Nakizone

[Gatekeeper]

Thanks Nakizone. Would appreciate the link at some stage.

A good example is Tony Alexanders claim that the US will lower their interest rates later in the year.
Why would Tony back the spin doctors?

Example:
Headlines last week:

GLOBAL MARKETS-Tame U.S. inflation data supports stocks, bonds
NEW YORK, May 15 (Reuters) - Stocks rose while Treasuries firmed and the dollar edged lower on Tuesday, as tame U.S. inflation data left open the prospect for Federal Reserve interest rate cuts later in the year.

U.S. consumer prices rose a smaller-than-expected 0.4 percent in April while core inflation, excluding volatile food and energy, was 0.2 percent, in line with forecasts. The annual core figure of 2.3 percent was below market expectations.

What point is there in inflation figures that exclude energy and food!! They also exclude housing prices!!

In reality inflation in the US is rampant

example:

“During the first four months of 2007, the CPI-U rose at a 4.8 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The acceleration thus far this year was due to larger increases in the energy and food components. The index for energy advanced at a 25.3 percent SAAR in the first four months of 2007 compared with 2.9 percent in 2006. Petroleum-based energy costs increased at a 40.0 percent annual rate and charges for energy services rose at a 9.4 percent annual rate. The food index has increased at a 6.7 percent SAAR thus far this year, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.2 percent SAAR in the first four months, following a 2.6 percent rise for all of 2006.”

What do these numbers mean? First of all, the seasonally adjusted numbers are there to put a little sugar coating on the real numbers, which were 5.7% for the first four months of the year.

That, folks, is a 17.1% annual rate of inflation. Energy rose at an annual rate of 75.9% in the first four months of 2007. Food rose at an annual rate of 20.1% so far this year. So, if you don’t eat or drive, you only experienced a 6.6% inflation rate, which is still much higher than the Federal Reserve is hoping for.

US rates going down?
Very unlikely.

Will the real inflation please stand up?

If core inflation is a deceptive statistic, where, then, does one find a more realistic measure? That is found in what is known to economists as headline inflation. Headline inflation includes the cost of energy and food.

A few contrarian observers have pointed out that headline inflation tells much more of the truth.

Charles Bean, chief economist of the Bank of England said in August 2006 that the US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices. According to Bean, “it should focus on headline inflation, which is much higher. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 percent, against 2.7 percent for core inflation”. He also pointed out correctly that energy prices were rising for the same reason the price of many manufactured goods are falling: the rise of China and other emerging market economies. Bean’s controversial statement came at the Fed’s annual Jackson Hole, Wyoming symposium. (Since Bean’s statement, energy prices have risen, which suggests that inflation is even higher than Bean’s 4.1 percent estimate).

In a piece titled “Inflation reporting errors continued”, Barry Ritholtz concludes that the Bureau of Labor Statistics has been “consistently under-reporting inflation over the past 8 years.” Worse, the amount of the discrepancy has widened dramatically, with “the gap between core and headline is now greater than it was in the early 1980s, and---hard as it may be to imagine---we are only slightly off the spread of the terrible 1970s.” The BLS and the Federal Reserve, according to Ritholtz, have deviated from reality, even though others around the world see the disconnect… “The basket of goods and services that is measured is so massaged and hedonically adjusted”, that it no longer reflects reality.

Tony Alexander sell's mortgages for a living.
Rates are going up, up, up!
We are printing money faster than the US!

[essence]

I paid $5000 to break the fixed term which paid for itself after only 12 months.

What Banks don't tell you, is that you are within your rights to pay off lump sum on fixed rate mortgages. The Banks may set a limit ie a lump sum must be a minimum of $10K or if you put up your weekly amount, you may not pay off more than $500 per week, over the mortgage amount due. There is no limit to the amount of large lump sums you pay off a year. These qualifiers differ from Bank to Bank.

It is illegal for the Banks to stop you paying off the mortgage early. What the Banks can do, is make it harder for you to pay it off, which is why they set the limit @ $10K.

This way, by paying off lumps sums, even on a higher %age rate,one can hopefully avoid the penalty that the Banks WILL impose to break a mortgage.

Why give the Banks more money?

[Re@der]

No views on whether this is the best strategy but it is my current interest strategy.
Uncertain times from the advice I have been given are a time to stagger so I tend to have some coming up for renewal every 6 months. At the moment with my current renewals being replaced going out from 18 months to 3 years

[whitt]

Anybody have any thoughts on where rates are now. I see ASB has lowered there rates

http://www.interest.co.nz/mortgages.asp