Fixed Interest

[WebBoard]

From: Mike .


When is a 1% increase NOT a 1% increase ???
From: Les
Date: 6/4/00
Time: 11:39:43 AM

G'day forum,

We have all watched as Interest Rates have started on their upward march. As one who has not yet Fixed my Interest rates, (the water's getting warmer, but this frog is not yet ready to jump out !!!), I have been watching my positive cashflow being eroded - at what seemed to be a MUCH FASTER rate than a 1% increase would suggest.

And then it hit me - of course, the 1% rise (over the last 6 months) is really NOT a 1% rise at all !!!!

For those newer ones (like myself) who have not already worked this out, let me explain:-

As an example, let me take the case of an investor taking out a mortgage at 6% - on a $200,000 loan, that would be $12,000 per year. With a 1% increase, he is now paying $14,000 per year. Of course, the REAL increase (in repayments) depends on what you were paying before, so in this example, the increase is $2,000 divided by $12,000 which is 16.66% !!!!!!!!

At the same time, tenants would likely WALK (or run???) if we were to hit them with a 16% increase (from $200 to $233 per week !!!).

So, if you are feeling the heat, I understand !! Maybe it's time to negotiate an 8% drop by refinancing at 0.5% lower ;^)

For those still on Variable (like me) are you "sticking with it?" I still don't see a huge jump into the future with the world of the Internet keeping competition up and costs low. But oil prices, or global upheavals can still have their effect .....

Also, at the time I bought my first IP's it would have cost 7.85% to go Fixed, while my Variable is now at 7.55% (after a 1% rise - REALLY 15% ) - so I'm still on the winning side.

And still sleeping at night ;^) - so far !!

Regards, Les

 

[WebBoard]

Andrew G

Reply: 1
From: Mike .


When a decision is not a decision
From: Andrew G
Date: 6/6/00
Time: 8:16:37 PM

Hi Les,

I'm surprised your post didn't get a little more attention from everyone. What you have seen is dead right, the impact on your cash flow is huge. This one hit me the other day on my way to pick up some take away (not that you really needed to know that but if you are interested it was some really great Vietnamese). How would you feel if you have just come off a honeymoon rate and jumped up from 5.5% to 7% and then by the end of the year it hits 8%. That would be a 45% increase....ouch!

This really drives home how much of an asset to the bank our liability is. Remember the stuff we talked about earlier in the year from the Kiyosaki weekend!!!

As to the question of interest rates. A friend of mine is a mortgage broker (always a good friend to have) and they have worked out that for the last 20 years even if you had fixed your rate at the best possible time you would still have come out worse off than sticking to the variable. And yes this does cover the fun and games in the 80's.

I really believe it is purely fear of the unknown that pushes people into fixed rates (I know I'll cop some flack over that comment). The banks have developed a product for the E and S quadrants and they do very well out of it. Fixed rates are just like options but you don't see the premium spelt out clearly. The premium is usually wrapped up in emotive ideas such as security and safety. I bet the fixed/variable split loan was a product developed to close the indecisive...everyone loves a bet each way it LOOKS like you can't lose. It's the decision you make when you don't make a decision. (Took a while for the post subject to make sense but we got there.)

The worry is the US economy. Its current rate of growth is fantastic and very attractive. So much money from all over the world is pouring in there the USD is crushing everything around it (just look at the AUD). As they push up rates to slow things down economic forces demand we follow. So the interest rate on your house is very much determined buy the spending habits of the US consumer...scary thought hey.

Now is a great time to borrow from the US banks. Our rates will follow theirs so no big problem there. The exchange rate is at a healthy low so as it raises you will have less to repay. A real winner would be to get onto one of their 30 yr fixed rate loans at the current exchange rate. The only worry you will have then will be the ass dropping out of the AUD but if this happens then we will all have much bigger problems than our mortgage repayments.

Food for thought.

Andrew.

PS. Are you just being a sneaky contrarian. Finding out what we are all doing and then doing just the opposite because you know that 90% of people are wrong anyway?

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: When a decision is not a decision
From: Les
Date: 6/7/00
Time: 6:11:59 PM

G'day Andrew,

If you can point the way for me into how to "borrow from US banks" I'd appreciate it. On a previous note (a month ago - plus?) you mentioned buying US bonds so as our Interest rate climbs, the gains from the bond offset the loss. My limited knowledge says bonds gain as Interest rate falls - what am I missing here? Would buying a bond be an easy, reasonable answer to our rate rises?

Me?? Contrarian??? What a thought!!! Well, possibly - I do have a healthy scepticism though. And over the years, I'd heard the odd comments about Fixed rates (the Bank's best friend) - and your comment about LOSING on Fixed EVEN THRU the late 80's was interesting. Could that really be true? I s'pose it could, as I recall Fixed rates around 14% when Variable was hitting 18% - so if the drop came quickly (like a bear market), then the 14% could look pretty sick in less than a year when rates fall.

Peter Spann says Fix when rates are rising, and stay variable when falling - simple enough, but maybe still not the best?

Always interested in your comments - thanks,

Regards, Les

 

[WebBoard]

Andrew G

Reply: 1.1.1
From: Mike .


Re: When a decision is not a decision
From: Andrew G
Date: 6/8/00
Time: 12:48:43 AM

Les>If you can point the way for me into how to "borrow from US banks" I'd appreciate it

Me>I have heard of others in Australia borrowing from US banks and it was done over the net. I have only been thinking this recently (last 2 months) but as you know I have had other priorities lately. Feel free to research it for me and let me know what you find...I might even buy you lunch for your trouble. Just think though if you borrow $200K today at 58 cents and the dollar recovers to say 62 cents by the end of the year your debt will be down by about 7% or $14K. If you are worried about the down side you can buy a forex option to cover this, but with the dollar where it is I'd be taking the punt. Just do a search for lenders in the US I bet you find heaps. Write up a form letter and send it to each of them asking if they lend to outside the US. Better still hit a US version of Mortgage Choice and let them do the hunting for you.

Les>On a previous note (a month ago - plus?) you mentioned buying US bonds so as our Interest rate climbs, the gains from the bond offset the loss. My limited knowledge says bonds gain as Interest rate falls - what am I missing here? Would buying a bond be an easy, reasonable answer to our rate rises?

Me> Yes you are correct but I was suggesting you use the futures market which will enable you to short sell bonds to have the reverse result. Yes this would be easy and reasonable but not straight forward. Do a bit of reading first (like you wouldn't).

Les>your comment about LOSING on Fixed EVEN THRU the late 80's was interesting. Could that really be true?

Me> Well he has no reason to make it up. That peak in rates was a very sharp spike. How would you feel if you went for the 14% for 5 years and were still paying this in the early 90's.

Les>Peter Spann says Fix when rates are rising, and stay variable when falling - simple enough, but maybe still not the best?

Me> Sounds fantastic. It sounds like "buy stocks when they are going up and sell when they are going down". What are rates doing now? Are they going up or have they peaked? Is this just a correction on their way down to 3% (we live in hope)? Will they stay at this level for the next 10 years?

The acid test for me is how much money would I put on my prediction? Am I so sure that I will take a position in the futures market and really kick a goal if I am right. If Peter Spann knows rates are heading north then that is some info I could really use. Take $20K and buy 10x 10 year bond contracts on the SFE. Rates move up 2% you walk away with $176K. If only it were that easy. I hope he trades his stocks with a better method than this (which I'm sure he does I'm just being a cynical bastard now.....must be time for bed).

Go grab Getting Started in Futures by some bloke it is in almost every book store and read it over the long weekend, actually it will only take a day to read.

Andrew.

PS Did you enjoy the football result tonight. Hang your head in shame all you Queenslanders, lucky for you it isn't a 4 game series the way the scores have been going. The next game would be more like a full time score at a Swans match rather than a half time one

 

[WebBoard]

Robert

Reply: 1.1.1.1
From: Mike .


US Lenders
From: Robert
Date: 6/8/00
Time: 10:30:19 AM

Guys

I've read your postings with great interest. I've actually jumped onto the below address, its a bit like http://mortgagechoice.com.au in Australia. http://www.cheapmortgage.com also has some good reading material to start with. I've sent an email inquiring if any of their lenders will lend to Aus customers. I'll let you know what reply I get back from them. Which may not be until tomorrow.

So here is a place to start.

Robert

 

[WebBoard]

Simon

Reply: 1.1.1.1.1
From: Mike .


Re: US Lenders
From: Simon
Date: 6/11/00
Time: 12:08:16 AM

Robert,

Well done, we await your response with great interest....

 

[WebBoard]

Robert

Reply: 1.1.1.1.1.1
From: Mike .


Re: US Lenders
From: Robert
Date: 6/12/00
Time: 12:22:20 PM

Well guy's this is the reply that I finally gotback from the email I had sent off. My next step, later this afternoon at work is to start hunting for these type of banks etc. I do know of a few such as Citibank, HSBC but if anyone has any further banks that could be good to investigate it would be much appreciated.

Robert

Unfortunately I am unaware of any companies that would do this, although that does not mean that none exist.

My best guess would be that you would have the best luck finding an international bank with offices in the US as well as Australia to be able to do this.

This isn't very helpful I'm sure, but it's the best I can tell you.

Good Day, Bruce Brown

 

[WebBoard]

Robert

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: US Lenders, still no luck with a contact as yet
From: Robert
Date: 6/13/00
Time: 3:50:03 PM

I'm still trying to get a contact for borrowing from the states. Have sent off 10-12 emails today and awaiting a reply over night.

Robert

 

[WebBoard]

Robert

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: US Lenders, I've had some luck with a contact!!
From: Robert
Date: 6/17/00
Time: 4:38:12 PM

I have been given a contact to talk to about taking a mortgage from the US. Though it's at my work email and I wont be back till next week. I will send off another email to the people I have addresses for.

As always I will update the forum again when I get more.

(Though it's a Damn shame the Aussie Dollar is recovering and will only get stronger again as the Olympics heads to our shores due to all the travellers coming into this great land of ours. Having seen what an influx of tourists can do to the exchange rate I'd expect the Aussie Dollar to be up around the 0.70c US by the time they hit our shores.)

Robert