Cairns Lockie Mortgage Commentary 2/12/05
Cairns Lockie Mortgage Commentary
Issue 2005 / 22 2 December 2005
Welcome to the twenty-second Cairns Lockie Mortgage Commentary for 2005. This is a fortnightly electronic newsletter, which aims to keep you informed on developments at Cairns Lockie, Mortgage Bankers and the mortgage market in general. Previous issues of this commentary can be found on our website http://www.emortgage.co.nz/newsletters.htm
The Money Market
This morning (8am on 2 December 2005) the money markets were at the following levels:
Official cash rate 7.00% (unchanged) 90 day bill rate 7.68 (up from 7.59) 1 year swap rate 7.63 (up from 7.57) 3 year swap rate 7.27 (up from 7.23) 10 year bond rate 5.86 (down from 5.91) Kiwi dollar 0.7040 (up from 0.6842)
Reserve Bank Strategy is Flawed
The Reserve Bank has been increasing its interest rates in an effort amongst other things to slow down the housing market. Will this work? We think not for the following reasons:
" Only about one in three households in this country has a mortgage. Most retired people do not and many families have an objective of paying off their mortgage as soon as possible. " Two out of three mortgages are written at fixed rates, and regardless of what the Governor does, these borrowers are only at risk when their fixed rates expire. " Many mortgages now being written are for business or investment purposes. This means the interest component is tax deductible which has the effect of lowering the overall interest rate.
It is ironic that the Reserve Bank's Financial Stability Report (18 Nov 2005) warns of strains facing many households and firms, on the abilities of some to service debt, when a significant contribution to these strains is the increase in interest rates driven by the Reserve Bank.
Lower Priced Properties
Recently Television One had an interesting news item on Close Up, about coastal properties available for less than $200,000. To a lot of people's surprise you can still do this but most of the likely locations are in the southern part of the South Island or on its West Coast. In Greytown which is in the Wairarapa, just north of Wellington, but unfortunately not on the sea coast, lower priced properties can still be found. Recently a two bedroom townhouse sold for $118,000. At a small township at Te Wharau, about fifty kilometres away, a 6,255 metre section which included some pine trees sold for a mere $19,000. If you look, there are some cheaper properties still around.
Not All Borrowing is Bad
While borrowing has received a lot of negative press recently, not all borrowing is bad. Many people need to borrow to purchase a home in which to live. Others borrow on assets producing an investment return, such as rental properties or farms. Borrowing to fund business expansion, which is going to lead to increased profitability, is also good. Even on a personal level, it can also be a wise move. If you can consolidate a large number of expensive hire purchase debts into your lower-rate mortgage, you can considerably reduce your outgoings. The important thing here is not to go back out again and re-borrow to purchase more consumer items on expensive debt. Sensible borrowing is a prudent thing and can be used to increase your overall asset position.
Some of our property-investing clients have mentioned to us, that they are considering offshore loans, with interest rates at 3 - 4% compared with our mortgage rates moving towards 10%. We think this is a really bad idea. By investing in an asset denominated in one currency while borrowing another currency, the borrower is taking on the additional role of a currency speculator. Should our currency depreciate by only 5% against the currency borrowed, most of your lower interest rate benefits will be wiped out. If the currency depreciation is more than 5% then the effective interest rate is higher than that which could have been obtained domestically. We believe that any borrowing should be in the same currency as the investment asset.
Our current mortgage interest rates are as follows:
Variable rate 8.90%
No Financials Home Loan 9.50
Jumbo Loan 8.90
Quick Start Home Loan 8.20
One-year fixed rate 8.63 Two-year fixed rate 8.34 Three-year fixed rate 8.24 Five-year fixed rate 8.04
Line of credit facility 9.00
Regards William Cairns James Lockie