Steve Koerber's Old Blog

Remuera's house sold name since 1998 – 021864166

Borrowing – what would Tony do?

Posted by Steve Koerber on June 17, 2009

071119_tonyalexanderThanks again to Tony Alexander (currently suffering from pneumonia, get well soon Tony) from the BNZ for his insightful commentary:

 

We have learnt nothing over the past week to alter our view on where interest rates are likely to go and what we think the best thing to do at the moment is for the average borrower. So if you read last week’s WO then you’ll gain nothing new this week. For those who did not read last week the guts of it is that if you are sitting floating waiting for the optimal time to fix – you missed it by three months!

But seriously, it is quite unlikely that fixed rates will decline from current levels so there is little point in hanging off if fixing is your goal. But there is not anywhere near the same need to act quickly as there was in March and over April because the strong NZ dollar is going to limit the extent to which wholesale interest rates rise in the near future. Personally I would fix three years though for many people floating is optimal because it is the only way to get an affordable debt servicing cash flow at the moment. If you are in that position – then frankly you may be taking on more debt than you can really afford.

 

 

Interest rates are below average at the moment and if you are floating you should be budgeting for 2% – 3% rate rises a couple of years from now. Run your numbers on that basis and see if you can truly afford the debt you are planning to take on.

As we noted last week, for business borrowers the dynamics are a bit different because there is a larger gap between low floating and highish fixed rates than for home owners. This different yield curve situation mainly reflects the fact that we NZ banks have traditionally competed for mortgage business using fixed rates.

Across the ditch the dynamics are different with competition mainly using floating rates. Don’t know why.

For business and farming borrowers there are strong cash flow advantages from floating. But be sure to budget for 2% – 3% rate rises two or so years from now. If you work out your debt servicing costs based on current low floating rates then you are setting yourself up for a major problem 2-3 years from now.

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