Wed, 26 Aug 2009 12:00a.m.
As no one in the world can say with any certainty what interest rates are going to do - should you fix / float or split your loan to hedge the risk?
Sorry I was too busy to read the weekend papers but believe comments were made as to fix vs. floating so I guess it will be interesting to see how my views match those of others.
I hope the emphasis wasn’t on either, but rather on how movements could impact on the lives of individual’s.
Many make a big deal about interest rates and tend to generalise about what people should or shouldn’t do without knowing anything about the borrower and their lifestyle.
It’s like saying a revolving credit facility will save you hundreds of thousands of dollars. Yet many found out the hard way that isn’t the case and yet others were elated when they did save hundreds of thousands of dollars.
Generally speaking people say, if interest rates are going up [ fix ] if they are coming down [ float ] until you think they are at their lowest then fix. They say that assuming the world’s financial markets are going to move forward based on past and failed theories. Personally I hope we don’t, look where it got us.
Think about it, long term rates are largely influenced by what happens in the States and yet recently there has been a rush of people fixing for the long term as some media commentators suggest to do. After watching the documentary on Detroit my running shoes will be staying where they are for a little longer.
What I do find disturbing is few are taking the opportunity to capitalise on rate cuts and instead are opting to spend rather than save. It’s like they have turned a blind eye to the lesson of the century. Debt reduction is the way forward.
When Jason called to get me to negotiate and re-fix his rate he was reluctant to leave the payments the same as he wanted to buy furniture and new 42” plasma. Nothing wrong with the plasma as every man should have one, so I put this to him.
Cost of the furniture and TV = $5000, over 24 months interest free that is $208 per month. The savings on his mortgage payments are going to be $637.
So I said, let’s increase your mortgage payments by $429 instead of the full amount which will allow you to get your oodies without any extra expenditure and you will save $68,664.04 on your home loan plus reduce the term from 22 years to 15 years and 3 months.
At the moment, governments including ours are holding interest rates at all time low levels to try and stimulate economies as they have done in the past. And then when you start spending the rates will go up.
This time, instead of spending [reduce debt] and cap the rate.
There are other ways to stimulate economies and just as I am putting this Blog together I receive an email confirming the Governor of the Reserved Bank is doing just that.
Brian Dalley is a qualified NZMBA Mortgage Broker, Property Investor and former Real Estate Agent.