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Archive for the ‘Interest Rates & Loans’ Category

Since global financial issues are important to New Zealand, it is important to keep tabs on the largest economy of them all in the United States.  One of the world’s wealthiest companies is the US Federal Reserve (no it is not Government owned like in New Zealand, Australia, United Kingdom and the vast majority of other countries).  Their chairman Ben Bernanke has huge responsibilities and has the unenviable challenge to try to resurrect the ailing US economy.  This cannot be an easy task and it must be hard for Americans to stomach the fact that it is not if but when they will be overtaken by China as the largest economy in the world.  Earlier this month China overtook Japan as the second largest economy in the world.

Ben Bernanke - US Federal Reserve Chairman

Last month Ben Bernanke told a congressional committee that the economy was “unusually uncertain”, however importantly he did not predict that it would fall back into recession.  Who am I to argue against Ben Bernanke on the US economy – so I am not panicking and can’t recommend that you sell your assets know.  Far from it, as there are some very good opportunities to those who have the cash to buy them.  I have seen a mentoring student purchase a commercial property at half of its CV on a vacant property, and another student buy a residential rental property at $200,000 below its CV (just over 30% below value its independent registered valuation), and there are some exciting businesses to purchase shares in with different degrees of volatility.

Then earlier this month the US Federal Reserve said it would use the proceeds from its own investments in various mortgage securities to buy longer-term US Government Treasuries.  As a result significant amounts of money will be pumped in to bolster the US economy and companies like Apple and General Electric will continue to enlarge their already massive treasure chests.

Bernanke’s four options for the US economy

At the annual Jackson Hole (Wyoming) symposium yesterday with central bankers, Bernanke said the recovery had slowed to “a pace somewhat weaker” than forecast.  He said that there are four “unconventional” options for the kickstarting of growth in the US economy.  With the US June quarter GDP growth at just 1.6%, a worsening balance of trade position, and continued high unemployment statistics, it appears that there will be a long hard road to recovery over the next couple of years for the United States of America.

What option or combination is yet to be seen.  The monetary policy intervention will continue and it has to.  Lets hope the US can recover and that this will spread onto Europe, which is not in great shape either.  As a global financial markets are facing challenging times.  There may be a positive spin-off to this bad news, if you are a borrower in New Zealand in terms of lower interest rates.  It is likely that the US medium and long term swap rates will stay at their current low rates for a significant period of time.

There’s a lot happening with interest rates at present, with many severe interest rate movements.  Also I have heard financial commentators on the radio, read in newspapers and seen on TV about how interest rates are going up, interest rates are going down and interest rates are going to stay relatively stable.  This is causing confusion amongst many borrowers.

The thing is all the commentators may be right.  This is because there is no such as the one interest rate.  For example if you went to your lender to get a loan right now, if approved you would be offered the choice of a floating or fixed rate.  If you choose a fixed rate, you would be offered the chance to fix this for 6 months, 1 year, 2 years, 3 years, 4 years, 5 years and if you are with BNZ, you have the additional choice of a 7 year fixed interest rate for maximum certainty.  For my overseas readers, we sadly do not currently offer the 10, 15, 20, 25 and 30 year fixed interest loan periods that many other developed countries and in particular the USA have.  I am hoping for a 10 year fixed interest rate in the near future – but I got told by a leading banker that this is unlikely.

Current interest rates

Leading financial website Tarawera Publishing Limited lists all interest rates from their providers.  I would highly recommend all serious property investors bookmark their interest rates page:  http://www.mortgagerates.co.nz

The average floating rate across all major banks is a smidge over 6% (when acknowledging the Westpac Choices rate discount).  The fixed rates for when you lock in a certain defined interest rate for a set period of time, have a strong yield curve currently.  That is the rates of interest you pay as the length of time you fix go up sharply.  It has to be noted that this yield curve is now flattening (visually you can see this here).  Floating rates have gone up a bit, and the longer terms rate down a lot lately.

From last Thursday to today all the major banks dropped their 2- 5 year fixed interest rates.  We saw a week or so after the Official Cash Rate was put up 0.25% by the Reserve Bank that the floating rates went up by around 0.25%.  The OCR doesn’t strictly control interest rates.  It however is highly influential on short term (variable, 6 month and 1 year fixed rates).  On longer term fixed rates (3, 4  and 5 year) it is not very influential at all.

These longer term fixed rates are driven more by the returns NZ term deposit savers expect, and thanks to the Reserve Bank’s rules in June 2009, banks are not permitted to raise as much ‘hot money’ that they got from institutional foreign lenders – this was short term money typically rolling over every 90 days.

What Borrowers Should Do?

As mentioned in previous blogs on financial topics, do not have all your borrowings on one rate. Split your borrowings across a variety of interest rate periods.  Just like I advise having different banks as your property portfolio grows (to avoid the one bank trap – thanks Kieran Trass for teaching me this in 2003), it is imperative to split your borrowings at times like this.  Consider having a property schedule like I do and all my mentoring students do, where they have the loans on their properties set out including the fixed period expiry date.  Then graph this to split your borrowing and have an interest rate averaging strategy (“IRAS”) for your borrowings.   Imagine if you have total loans of $600,000.  You split them in this way:

1. $100,000 floating at 6.00%
2. $100,000 1 year fixed at 6.50% fixed interest rate period expiring 5 July 2011
3. $100,000 2 year fixed at 6.90% fixed interest rate period expiring 5 July 2012
4. $100,000 3 year fixed at 7.30% fixed interest rate period expiring 5 July 2013
5. $100,000 4 year fixed at 7.60% fixed interest rate period expiring 5 July 2014
6. $100,000 5 year fixed at 7.80% fixed interest rate period expiring 5 July 2015

In one years time your loan when the one year fixed rolls over, ie loan 2, you fix this loan for 5 years so it expires on 5 July 2016.  That way you have 6 loans all expiring at different times.  This does give you some protection in that if interest rates move up suddenly by 3% in one year (unlikely but possible), you only suffer an average rise of 0.5% in this way (as opposed to suffering all 3% rate increase if you were floating).  Conversely if interest rates fall 3% in one year, you would only get 0.5% saving, than if all your interest rates were floating.  This IRAS also makes choosing your next interest rate period quite easy!

Now of course life isn’t that simple and you can’t expect to be able to do this exactly – I don’t.  In fact like my mentoring students who I professional advise I am overweight to loans expiring around March 2014.  I broke this IRAS when the 5 year interest rates were so fundamentally cheap in March last year – I just couldn’t help myself!  The result of this is the saving of hundreds of thousands of dollars in client wealth from the number of people I was able to convince 6.5% for 5 years was a great deal.  It wasn’t a hard sell either – the catch is you have to follow financial cycles and interest rate movements.

Issues

There is a risk of a double dip recession.  Lets face it, whilst we are out of a recession the market is hardly booming.  I see Mortgagee Sales slightly rising, the number of days to sell a house rising, more fear in the market as to house price drops owing to fears investors will sell up with reduced returns thanks to the ETS, GST rises they cannot pass on (residential rental income is excluded from GST, as are interest costs, but rates, repairs & maintenance, property management fees etc are all subject to the GST increase).

With floating rates rising and scheduled to rise over the next 18 months, their may be some benefit fixing your rates.  The 4 and 5 year rates at around 7.5% – 7.85% now are looking more attractive (they simply weren’t at 8.5% or so).

The 2 and 3 year rates at 6.74% – 7.3% are other good possible options.  No-one has a crystal ball.  I think house prices will continue their slight decline to be down around 5% for the calendar year 2010.  This is on thin volumes too.  There is no doubt that we are in a property market downturn stage of the property cycle.

Talks of a recovery are too swift.  You only need to drive around Albany, down Wairau Road, around the back of Lynnmall in New Lynn, along Marua Road and to talk to commercial property investors and agents, look at the share price and annual financial reports of the listed property trusts to see that the commercial property market is struggling.  Taking depreciation off commercial property owners (including many owner occupiers) as well as residential property investors hasn’t helped things either.

Without trying to sound too special, I did say fix your borrowings last March in my blog titled Why are you floating – FIX LONG NOW!  If you didn’t consider my opinion and thought that you could outsmart the financial markets, and were proved wrong, you may have cost yourself and your families many thousands of dollars in extra interest paid to your bank.  That is ok, everyone makes mistakes including me.  However there is little point trying to fix it by floating everything now.  Spread your risk and spread your borrowing across a variety of interest rates, floating and various fixed terms.

Disclaimer:

The information contained on this website and from any communication related to this website is for information purposes only.  David Whitburn, Iodide Limited or entities owned, controlled or associated with David Whitburn (“David Whitburn entities”) do not hold themselves out to be providing any legal, financial or other advice.  David Whitburn entities do not make any recommendation or endorsement as to any product, investment, advisor or other service or product or to any material submitted by third parties or linked to this website.  Furthermore, David Whitburn entities do not offer any advice regarding the nature, potential value, viability or suitability of any particular investment, security or investment strategy for you or your needs.

The material on this website does not constitute advice and you should not rely on any material in this website to make or omit to make any decision or take or omit to take any action.

The OCR has been raised today by 0.25% to 2.75%.  This is the first movement in the OCR since 30 April 2009, and the first raise since 26 July 2007 (when it was at a massive 8.25%).  Expect floating and short-term interest rates to go up.

Here’s what Reserve Bank Governor Alan Bollard said as report on the Reserve Bank website:

The economy has entered its second year of recovery with growth becoming more broad-based.

The recovery in trading partner activity is continuing, with growth in Asia particularly strong. Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand’s export commodity prices have increased sharply over the past few months, boosting export incomes.

In contrast to signs of global economic recovery there has been renewed turmoil in financial markets. Currently, we expect the main impact on New Zealand to come through continuing upward pressure on the cost of funds to the banking system.

In New Zealand, growth of around 3½ percent is expected this year and next. The main drivers of this outlook are higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. However, we expect households to remain relatively cautious, with the housing market and credit growth staying subdued. This moderate household spending contributes to some rebalancing in the economy.

Underlying CPI inflation is expected to track within the target range even as the economy expands further. That said, headline CPI inflation will be boosted temporarily by the announced increase in GST and other government-related price changes. Provided households and firms do not reflect this price spike in their wage and price-setting behaviours we do not expect a lasting impact on inflation.

“Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments.

The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycles.”

Saturday 29 May 2010

8:30am start to 6pm finish (registrations from 8am)

Parnell Jubilee Hall, 545 Parnell Road, Parnell, Auckland

The 2010 Annual Budget has just been presented and it implements the largest tax reforms New Zealand has seen in 25 years.  To arm you with the knowledge and tools to succeed in light of the Budget and in today’s market, the not-for-profit Auckland Property Investors’ Association (APIA) have a 1 day seminar BUDGET BUSTER 2010 – Strategies for Today’s Market with tickets at just $49.

The speakers include multiple best-selling Author and NZ Property Investors’ Federation Vice President Andrew King, who provides a State of the Property Investment Nation address, then sets the theme for both newer investors and more experienced investors with substantial portfolios.  APIA’s Treasurer & Chartered Accountant Ann Loudon has the all important topic of tax changes to go through, particularly in light of the depreciation changes and the taxation treatment of LAQCs to have to become aligned to Limited Liability Partnerships.  APIA’s Honorary Solicitor & Property Lawyer Tony Steindle then talks about structures, including the legal aspects of the Limited Liability Partnership, and APIA Vice President, Property Mentor & Trust Lawyer David Whitburn talks about what to buy in today’s market, how to buy it and how to analyse just what is a good deal or not.  APIA President & former NZ Mortgage Broker of the Year Sue Tierney then talks about finance in light of the turbulent global financial crisis we are in, particularly with the highly indebted European Union countries and the relevance of this to New Zealand.  ANZ Mobile Mortgage Manager Vanessa Murch then covers off financing in New Zealand, including why fixed interest rates are so high in comparison to floating loan rates and just how we get our loans approved.  In case this wasn’t enough content, we provide further value to you in relation to tenancy management with APIA Board Manager and Principal of leading boutique Property Management Firm Corinthian Limited Jan Galloway, presenting on how you should manage your property to get the best tenants and lowest vacancy rates.  This is combined with a presentation by Tenancy Practice Lawyer Scotney Williams, giving his expert advice on the Residential Tenancies Act including recent times and also proposals to reform parts of it.

So don’t delay, BOOK YOUR TICKET for Saturday 29th May at the Parnell Jubilee Hall by emailing admin@apia.org.nz now.

New Zealand is following its economic big brother Australia and is doing well in recovering from the depths of the long recession we had.  The major news for New Zealand last week was that our unemployment rate dropped from 7.1% to 6.0% in a single quarter.  This was a stunning turnaround, and I am now very worried that Reserve Bank Governor may take this important statistic as a signal to reduce the fiscal stimulus that a low OCR provides (lower funding costs to businesses, and less punishment to a weakened housing sector at present) and raise the OCR by 0.25% early than 16 September as I thought likely, to 26 July or possibly even on 10 June.  Last Thursday night and Friday saw most of the major banks raise their 6 month, 1 year and 2 year short term fixed rates.  I am personally predicting 26 July for the first rise in the OCR right now.  One thing is for certain – floating interest rates and short term interest rates are going upwards.

As the All Whites have named their squad and head to South Africa for the FIFA World Cup for the first time in 28 years, we are going to be fed a diet of the beautiful game.  Whilst I haven’t played outdoor soccer for 3 years now, I have been enjoying playing Indoor Soccer (FIFA Futsal to be pedantic) at the ASB Stadium in Kohimarama.  Why this is relevant is that Auckland is blessed to have so many people from a number of countries around the world.  In our Masters League (must be >30 years old) we have players from Spain, France, Italy, England, Greece, Germany, Denmark, Sweden, Wales, Scotland, Ireland, Uruguay, Chile, Brazil, Argentina, Bolivia, Columbia, USA, China, Japan, South Korea, Indonesia, Singapore, Malaysia, Thailand, Australia and of course plenty from New Zealand.  I got thinking after the games about the various countries in the world really struggling, particularly those in Europe.  Grecian rioting about cuts to pensions and Government workers’ wages, and Greece’s mega bailout by the European Union is highly topical.  With more debt defaults and concerns raised about Portugal and Spain’s Government looking in peril, this caused a lot of fear in the market.  These events saw the Dow Jones industrials to a loss of nearly 1,000 points (to below 10,000 points) in less than half an hour, with a few thousand computer aided trades processing many hundred of trades in a single second, providing a red herring to the core issue of global financial instability. Gold prices soared to record highs at US$1,248.60 per ounce (12 May 2010).

Greece’s economic collapse

Will the Euro collapse?  I don’t think so.  Greece has been a scare, and Spain and Portugal are making bankers nervous.  However the economic  powerhouses of Germany and France wouldn’t want to see that, and the epic meeting by the 16 finance ministers of the EU full member countries came up with a 110 billion Euro bailout of Greece, in return for Greece’s Austerity Plan.  Greece’s welfare state where they promised the earth to their pensioners and looked after their civil service extremely well, has at last had to come to an end.

The riots will still likely continue as the EU have imposed stringent conditions on the bailout.  Prime Minister George Papandreou said that this will involve “great sacrifices” and signal an end to their failed welfare state.  The austerity plan aims to achieve fresh budget cuts of 30bn euros over three years – with the goal of cutting Greece’s public deficit to less than 3% of GDP by 2014.  It is currently a massive 13.6% of GDP.

The measures include:

• Increasing VAT from 21% to 23%
• Banning increases in public sector salaries and pensions for at least three years
• Scrapping bonus payments for public sector workers
• Capping annual holiday bonuses and axing them for higher earners
• Raising taxes on fuel, alcohol and tobacco by 10%
• Taxing illegal construction

Finance Minister George Papaconstantinou stated that Greece had been called on to make a “basic choice between collapse or salvation”.

Floaters and short-term fixed rate borrowers can breathe a bit easier in the knowledge that their pockets will not be adversely effected, with the Reserve Bank today announcing that he will leave the Official Cash Rate (OCR) unchanged at 2.5 percent.  Reserve Bank Governor Alan Bollard said:

The New Zealand economy is recovering broadly as expected and growth is predicted to pick up further through 2010.

Trading partner activity has recovered more quickly than we expected. Growth in Asia has been particularly strong. Consistent with this, export commodity prices have increased close to their 2008 peak. At the same time, risks to the global outlook remain elevated.

Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt.

On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.

As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected. [emphasis added]

The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.

My Interpretation and Predictions

I think that ANZ National Bank Limited’s Chief Economist, Cameron Bagrie’s prediction for no rise in the OCR until September 2010 to hold true.  This is because of the wording which I put in bold to emphasis it.  Governor Bollard has bought the Reserve Bank time, and now is very unlikely to raise the OCR to 2.75% at the 10 June 2010 OCR review. I believe that the recovery New Zealand is experiencing is going somewhat slowly and a lot of business owners, property investors and home owners are unfortunately still feeling the ‘pinch’.  As a result I also consider it slightly unlikely at this stage, that the OCR will be raised on 29 July 2010.  This fits into the time-frames that Governor Bollard suggested with his oft repeated statements early last year, that the OCR will not be raised “until the latter part of 2010″.

Source: http://reservebank.govt.nz/news/2010/3970584.html

Congratulations to HSBC, the world’s largest bank, who have led the market with some significant rate drops. Already HSBC were the cheapest at the 1, 2, 3 and 5 year fixed terms.  Now they have cut all fixed rates across the Board.  Here are HSBC’s hot new rates:

The 6 month HSBC rate at 4.99% is amazing, with clear daylight until their next closest competitor National Bank at 5.70%.  The 1 year HSBC rate becomes even cheaper at 5.49%, with National Bank and Westpac at 6.15% retail (you can usually negotiate 0.1% off this rate from these two banks by just asking).  The 2 year HSBC rate at 6.49% is well cheaper than BNZ, ANZ and Westpac’s 7.10%, and the 3 year HSBC rate at 7.29% beats the BNZ classic rate of 7.50% (with the other lenders off the pace at 7.70%).  The 4 year HSBC rate at 7.69% and 5 year HSBC rate at 7.99% are not pushed by any main tier lenders.  They average 8.20% for 4 years and 8.50% for 5 years, with Sovereign offering 8.65% to fix for 5 years (although you would probably say no thank you to this rate).  The next best competitors for the 4 year rate are actually the Public Trust at 7.99% fixed for 4 years and AMP Home Loans at 8.10%.

Refinancing

I refinanced away from Sovereign (a second tier lender with comparatively poor interest rates) last week to ANZ.  I got a good $500 contribution towards legal fees to compensate me for the transfer costs, and I will save many hundreds of dollars each and every by not being with Sovereign.  No valuation was required as I could use the CV and I have always been a little bit conservative with debt doing this transaction at 70% of loan to CV (which would be a little bit less than a registered valuation in my case).  ANZ just made things so easy for me.

Many investors do not know that Sovereign pay amongst the very highest rates of commission to mortgage brokers, so it is not totally surprising that many property investors have loans with Sovereign, given the commission cuts and some banks refuse to deal with brokers over the past few years (BNZ, HSBC, Kiwibank to name a few).  Sure Sovereign have a sound product, but they are really not the market leaders with interest rates and they do seem to follow ASB (same parent company – the Commonwealth Bank of Australia) with a premium loaded on!

So perhaps it is time for you to review any loans you have with Sovereign or any second tier, third tier or alternative lenders.  If you are in good financial shape like many investors unknowingly are, then consider refinancing to HSBC Premier, or at least a main tier bank interested in lending.  I am well connected to people in the banking industry and understand that banks are still lending, they are just being picky, and can afford to be.  However different banks have different credit policies at different times.  You want to be the master of your own financial destiny.  If you are not getting the best interest rates and/or loan features that you want, it may be worthwhile considering a change.  Don’t hesitate to contact me on david@davidwhitburn.com if you want some good banking referrals to help strengthen your own portfolio – I am not a broker myself, but a property mentor wanting people to achieve all they can through property investment.

Technical Note – HSBC Premier criteria (at 7 April 2010):

As sourced from HSBC’s website:

• A minimum value of NZD500,000 in home loans with HSBC in New Zealand (facility limit not outstanding balance); and/or
• A minimum value of NZD100,000 in savings and investments with HSBC in New Zealand; and/or
• If you’re an overseas HSBC Premier customer, you’ll automatically qualify for Premier customer status in New Zealand

Note: Once you become a qualified HSBC Premier customer minimum home loan values no longer apply, although other home lending criteria may still need to be met.  Ie. When you buy your $2.5 million Kohimarama dream home in Auckand eastern bays with views of the Rangitoto and the North Shore, and you pay down your mortgage to below $500,000, you are not suddenly excluded from being an HSBC Premier customer and subjected to loaded interest rates (usually 0.5% premium).

You can find out more by calling into an HSBC branch, emailing premier@hsbc.co.nz, or contacting the HSBC Premier Call Centre on 0800 028 088 (within New Zealand) or +64 9 368 8557 (outside New Zealand).

Disclosure of Interest: Related parties of mine that I could hold a beneficial interest in have minuscule shareholdings in HSBC (FTSE UK), and all Australian Banks (CBA, NAB, Westpac, ANZ).

Glenn Stevens, the Governor of the Reserve Bank of Australia (“RBA”) has just raised the Australian Offical Cash Rate 0.25% to 4.25%.

This is important to New Zealand as sadly we do tend to try to follow our big brother country and closest neighbour, Australia.  Now we don’t have the same pressures as Australia do in terms of our economy still struggling a little bit.  We are out of recession, but business is hardly booming.  Unemployment is still high, and house prices are not taking off, and moving upwards as they did in 2009.

As a result on 29 April, our Reserve Bank Governor Alan Bollard will in all likelihood leave our OCR unchanged at 4.25%.  On 10 June currently I am 75% confident that he will also leave the OCR unchanged.  Unfortunately our economy is not currently as good as Australia’s economy, and nor has it been for quite a while.

RBA Governor Stevens was worried last week that house prices were “getting too high”, and in response to questions about inflicting pain on home owners and property investors through causing higher short and medium term rates:

Interest rates to most borrowers nonetheless have been somewhat lower than average…

With growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.”

New Zealand is very much a different country to Australia, and currently we have few inflationary pressures, cyclically high unemployment and very low house price growth, and an already high currency (higher interest rates tend to mean overseas investors buy NZ Dollars to invest for the good yields they can get), we have far less pressure on us to raise our interest rates.

See the NZ Herald article for more details.

So why are the long term fixed borrowing rates so much higher than shorter term rates at present?

5 reasons why there is such a difference now:

1. OCR doesn’t correlate well with long-term interest rates

2. Risk premium for OCR rises

3. Deposit rates:

The Reserve Bank Governor, Dr Alan Bollard has just announced that the Official Cash Rate (“OCR”) is to remain unchanged at 2.50%.  This move was widely expected by economists.  On discussions with my business banking contacts they say that they have already factored in a 0.5% increase into fixed rates by 30 June of this year.

Dr Bollard’s press statement interestingly said that:

the New Zealand economy continues to recover…

The economy is being assisted by both monetary and fiscal policy support…

If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010.”

As a result I predict that the major banks will not change their floating rates, but perhaps edge up their 1 – 3 year rates a little bit further.  The floating rates will rise when the OCR rises.  I predict that the OCR will stay unchanged on March 11, April 29, but then rise by 0.25% on 10 June 2010.