It's time to think about interest rates again

24 November 2017

 

It's time to think about interest rates again

Interest rate risk

 

 

 

There is some talk that interest rates could jump up suddenly.  At this stage it is just talk, but how good is your mortgage strategy?  Have you reviewed it recently?  And what would happen to you if interest rates jumped up suddenly?

 
I last looked at interest rates in November 2016, and, at that time, ASB and BNZ had just raised their 3 to 5 year rates.  I was therefore expecting interest rates to slowly move up over the last year and be maybe 5% by now.  Obviously this was completely wrong with the short term rates.  The 1 to 2 year Interest rates are still extremely low and haven’t really moved.  From www.interest.co.nz the best rates are:

1 Year 4.19%
2 Year 4.29%
3 Year 4.79%
5 Year 5.59%
 
While the 1 and 2 year rates are still extremely low, the longer term rates have moved up slightly.



Four Key Points to Consider:
  

1. Negotiate – If you ask for a better rate, you can often get a discount off the standard rates.  Or use a mortgage broker so that they do the running around for you and can negotiate on your behalf.  You can definitely get a good discount off floating rates!

A great line can be:  "My accountant told me that I should be getting 4.55 for 3 years."  Or "my accountant told me that his other clients are getting at least a 0.2% discount."  Worst case, the bank still won't give you a better rate, but it can be an wasy way to ask for a better rate and you are blaming it all on someone else (me!).

2. Don’t have too much floating – the idea with a floating loan is that you can pay it off before your next fixed loan comes up.  So if you think you can only pay off $20,000, then your debt in your floating loan should be around $20,000.  The best floating rate on www.interest.co.nz is 5.65%, or 1.46% higher than the 1 year rate!  So if you had a high floating loan of $300,000, you would be paying $4,380 extra interest per year!

3.Rental debt vs Private debt – When we complete your financial statements, we will identify in our letter if there is an opportunity to borrow more in the rentals that is tax deductible and therefore reduce your personal home debt where there is no tax deduction.  This can often be a simple change at a very small cost.  For example, if your rental Company owes you a $200,000 shareholder current account and you have a personal house debt over this, then the Company could borrow $200,000 and repay you,. Therefore the interest on the $200,000 would be deductible and could save $3,000 in tax per year!

It’s essential to do this right and to get expert advice.  So if you think this could work for you, then contact us and we can help you through this process. 

4. Spreading loans – If you have all your loans fixed for 1 year, then you are gambling that interest rates will go down.  If you are right, great.  If you are wrong, then it could cost you a lot in extra interest!  Obviously no one has a crystal ball, so everyone is guessing what will happen.

 
I like the approach of ‘don’t put all your eggs in one basket’.  Therefore, if I had a $920,000 mortgage, I might split it into:

  • $20,000 floating
  • $300,000 at 1 year
  • $300,000 at 3 years
  • $300,000 at 5 years.

 
The average interest rate is still only 4.9%.  If you negotiate, you will be able to get this lower too!
 
Under a spreading approach, if interest rates go down or stay the same you still do OK as you have some loan fixed for 1 year.  If interest rates go up, you still do OK as you have some loans fixed for 3 and 5 years.  You might not get the best interest rate, but then you are not gambling on one outcome either.
  
Overall it’s not about panicking and rushing a decision.  Instead, it’s about thinking about your long term approach and your preferred risk level.
 
Kind regards
Ross Barnett 

 

 
 
 
 

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