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Interest rates due to rise again - is what's the options??
by Lynnette Butler, May 2010 The long overdue interest rate rise is due to hit very soon. After a period of record interest rates lows - many kiwi home-owners are looking at their finance options with trepidation. Of course, we all knew that, like the summer sun, the rates would not last forever - but man o man - did we want them to!! The good news is the budget has left us all with a little more in our back pocket - although with gst hikes and inflation expected to rise to near 6% this year, don't get too comfortable about that - it will be short-lived! So what ARE our options? The experts report that it is likely that rate hikes will be more successful in steadying our economy this time round - remember in 2008 when we had interest hike after interst hike - largley unsuccessful in stopping the 'housing bubble' as most of us had long term fixed rates?? After such good low rates, kiwis have been considering leaving their mortgages floating, and there is a growing feeling that this may pan out well for them to do just that. The interest rate for floating might very well rise, and quite quickly, but when you consider they are currently all under 6%, and most fixed rates are painfully close to 8%, the floating would have to go, and stay, above 9% to make a fixed medium-term rate a good option.
It is my opinion that we are due for a period of high inflation, but to what level is yet to be seen. Will it go to 10%?? Current commentry doesn't think so. But the dark clouds of recession have not yet cleared globally, so even the crystal ball is still very murky. That thought makes someone considering their options at the moment lean towards a longer rate - oh the choices!! My pick is to select more than one option. I am a BIG believer in 'hedging your bets' - interet rates are not a game of picking a winner - but of choosing an option which you can AFFORD, and are SATISFIED with. Medium sized loans should be broken into 2 rate options, and large loans into three. My pick today (May 2010) would be split floating/3yr - remember my mantra is "any rate under 8 - is great!!" If fixing, don't be tempted too short a term, as you may well pay the price on the next round. You would be as well to ride the floating rate and get a true market rate all through the period. Remember - the banks have experts trained in economics to estimate where the rates will go in the next few years, and then work in a margin to suit the risk. The time to choose a long rate whipped past us in February/March 2009, when the quick managed to pick up rates as low as 5.9% for 5 years. Compared to the 5 year rate which went up to mid-high 8's within months, and is 8.5% today. its almost as if the banks are trying to put the margin for error back in that wasn't there in March 09. Russian roulette anyone??
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