Interest rates - why bother?

Please note this sub-forum does not provide professional finance advice. You should seek advice from a licensed financial advisor.

To post in this sub-forum you must have made 100 posts or have Trust status or have completed our ID Verification.

If investing please consider our affiliate link for new accounts: Sharesies.

Forums › Finance and wealth management › Interest rates - why bother?

1 | 2 | 3 | 4 | 5 | 6

937 posts

Ultimate Geek

#2551263 28-Aug-2020 13:08

OldGeek:
While the CPI for June 2020 quarter is -0.5%, the CPI for July 2019 to June 2020 is +1.5 (being +2.0 for the first 3 quarters and -0.5 for the last). This is a year in which we had a COVID 19 Level 4 lockdown. So savings account interest of +1% did go backwards and the gap will worsen as the CPI is not affected by negative quarters.

Yeah, that's what I said above - annual inflation to June was +1.5%. But three of those quarters were pre-COVID, so we're only seeing the affects from the June quarter, which is -0.5%.

Having said that, I guess for a saver the damage was really done post-GFC, when savings rates did their big falls.

Oblivian

7297 posts

Uber Geek

ID Verified

#2551269 28-Aug-2020 13:18

Term desposit holders are also feeling the burn.

Know a few that are about to mature from the original 5/10yr good rates back then of the 3-5% vintage. Of course believe re-investment comes at the new rates. A whopping ~1.4 for 1+yr

Geektastic

17943 posts

Uber Geek

Trusted

Lifetime subscriber

#2551274 28-Aug-2020 13:25

robjg63:

Getting to that point in life and yes its a concern.

Also a concern that mega low mortgage rates will crank up the house prices even further - how can it do anything else but let people shovel more money at a shortage of housing supply? Even more of a concern will be when (at some stage) the rates climb back up even a little, how many will not be able to pay their mortgages.

I am not seeing the brilliance of zero interest rates...

As I have said before, if you want people to put money somewhere else other than property, you need to look at some other form of saving that gives tax relief.

For example, a Kiwisaver style account where any money you put in, perhaps up to an annual limit, is net of tax.

We want people to save for old age - you need carrot as well as stick and NZ is unusual in taxing retirement saving.

PhantomNVD

2619 posts

Uber Geek
Inactive user

#2551281 28-Aug-2020 13:49

Personally my plan is to crank up my Morgage repayments (I’m only 43 with 380K debt left on my (now GVR 900K house).

My wife keeps pushing to use our equity to leverage another house (or 2,3,4!) but I’m totally against the kind of serfdom imposed by the rental forces in this country, so would rather smash my own Morgage rather than either invest (though I have a KiwiSaver on 4% contributions) or remortgage again!

mattwnz

20157 posts

Uber Geek

#2551339 28-Aug-2020 14:25

Geektastic:
robjg63:

Getting to that point in life and yes its a concern.

Also a concern that mega low mortgage rates will crank up the house prices even further - how can it do anything else but let people shovel more money at a shortage of housing supply? Even more of a concern will be when (at some stage) the rates climb back up even a little, how many will not be able to pay their mortgages.

I am not seeing the brilliance of zero interest rates...

As I have said before, if you want people to put money somewhere else other than property, you need to look at some other form of saving that gives tax relief.

For example, a Kiwisaver style account where any money you put in, perhaps up to an annual limit, is net of tax.

We want people to save for old age - you need carrot as well as stick and NZ is unusual in taxing retirement saving.

Kiwisaver accounts have varying risks depending on the fund. You can even put it into a cash fund but that isn't likely to get much more than it would in the normal bank. But kiwi saver money is usually locked in until the person reaches retirement age.
My major concern is currently it appears that people are moving money out of the bank and into higher risk things and as a result both shares and property appear to be at historic High levels. We may have another share market crash or correction and the market may not recover, or in the same way and at the same speed. We are on new territory.
We want people to save for old age but decreasing interest rates to almost 0 is hardly an incentive to save. Instead it has forced people to take higher risks. In a normal interest rate world prior to the GFC term deposits offered a good investment rate. It is only in the last few years it has got really bad. I can't imagine how it will go longer term with rates being so low. But it did appear to have helped create property and share price bubbles which don't seen to collelate to the covid world.

mattwnz

20157 posts

Uber Geek

#2551347 28-Aug-2020 14:41

PhantomNVD: Personally my plan is to crank up my Morgage repayments (I’m only 43 with 380K debt left on my (now GVR 900K house).

My wife keeps pushing to use our equity to leverage another house (or 2,3,4!) but I’m totally against the kind of serfdom imposed by the rental forces in this country, so would rather smash my own Morgage rather than either invest (though I have a KiwiSaver on 4% contributions) or remortgage again!

A lot of people seem to be becoming landlords as a result of current conditions with low interest rates. But there are now standards that houses must meet to be suitable for rentals and many NZ houses are cold damp places that will need a lot of work / money spendingon them. Also some would solely be relying on capital gains as the rent may only just cover costs but capital gains are not guaranteed. I have done my sums on some and it didn't work out when taking into consideration other costs like rates and insurance and maintenance. Dealing with some tenants also isn't easy.

mattwnz

20157 posts

Uber Geek

#2551391 28-Aug-2020 14:48

Oblivian:
Term desposit holders are also feeling the burn.

Know a few that are about to mature from the original 5/10yr good rates back then of the 3-5% vintage. Of course believe re-investment comes at the new rates. A whopping ~1.4 for 1+yr

And that deposit is not government guaranteed, like it would be of deposited in a bank in Australia, up to a certain amount. I enquired with my bank about kiwi bonds but the bank wanted to charge me a percentage fee that was greater than the interest rate. So I would literally be paying them to lend it my own money. So my amount would go down! Hope the banks won't start paying interest for people to take out home loans if the OCR goes negative.

Sharesies

Trade NZ and US shares and funds with Sharesies (affiliate link).

eracode

Smpl Mnmlst
8855 posts

Uber Geek

ID Verified

Trusted

Subscriber

#2551424 28-Aug-2020 15:53

Oblivian:

Term desposit holders are also feeling the burn.

Know a few that are about to mature from the original 5/10yr good rates back then of the 3-5% vintage. Of course believe re-investment comes at the new rates. A whopping ~1.4 for 1+yr

In recent days the NZX50 has been within a hair’s breadth of regaining its Feb pre-COVID all-time high of 12,107. Given current economic circs this doesn’t really make sense so demand for shares is likely being driven at least partly by investors who would otherwise be in bank deposits.

Sometimes I just sit and think. Other times I just sit.

mattwnz

20157 posts

Uber Geek

#2551427 28-Aug-2020 16:01

eracode:

Oblivian:

Term desposit holders are also feeling the burn.

Know a few that are about to mature from the original 5/10yr good rates back then of the 3-5% vintage. Of course believe re-investment comes at the new rates. A whopping ~1.4 for 1+yr

In recent days the NZX50 has been within a hair’s breadth of regaining its Feb pre-COVID all-time high of 12,107. Given current economic circs this doesn’t really make sense so demand for shares is likely being driven at least partly by investors who would otherwise be in bank deposits.

During lockdown it appears a large number of NZers really got into the sharemarket , with tools such as Sharesies and Hatch. Likewise house sales have been huge after lockdown, as all this money has to go somewhere. I just hope we don't see a repeat of the finance company collapse, where people have put their money into higher risk things, due to the lower rates at the bank. Although ironically back then, the interest rates at the banks were pretty good, but not relatively so.

sen8or

1789 posts

Uber Geek

#2551428 28-Aug-2020 16:06

For those that fondly remember investment returns of 8%, don't forget that they also came with mortgage rates of 12-15% or more for borrowers.

GV27

5897 posts

Uber Geek

#2551431 28-Aug-2020 16:13

sen8or:

For those that fondly remember investment returns of 8%, don't forget that they also came with mortgage rates of 12-15% or more for borrowers.

Record low interest rates are pretty much the only thing that's changed in terms of housing affordability - the houses themselves are more expensive than ever.

mattwnz

20157 posts

Uber Geek

#2551436 28-Aug-2020 16:28

sen8or:

For those that fondly remember investment returns of 8%, don't forget that they also came with mortgage rates of 12-15% or more for borrowers.

We don't appear to have had interest rates that high for decades. I recall in the 90's interest rates went under 10%. 8% is seen as a normal rate that people should expect to be able to service.

But are interest rates of 8-10% bad for first home buyers?House prices were also cheaper when interest rates were higher, so they are likely still paying the same amount each week to service that mortgage. The big difference with lower interest rates, which results in higher house prices, is that the borrower then needs to stump up with a far larger deposit. . Now they will likely need 100k+ deposit, which could take years.

eracode

Smpl Mnmlst
8855 posts

Uber Geek

ID Verified

Trusted

Subscriber

#2551439 28-Aug-2020 16:34

mattwnz:

sen8or:

For those that fondly remember investment returns of 8%, don't forget that they also came with mortgage rates of 12-15% or more for borrowers.

We don't appear to have had interest rates that high for decades. I recall in the 90's interest rates went under 10%. 8% is seen as a normal rate that people should expect to be able to service.

But are interest rates of 8-10% bad for first home buyers?House prices were also cheaper when interest rates were higher, so they are likely still paying the same amount each week to service that mortgage. The big difference with lower interest rates, which results in higher house prices, is that the borrower then needs to stump up with a far larger deposit. . Now they will likely need 100k+ deposit, which could take years.

Almost Catch-22 - you can now afford to service the loan but can’t afford the deposit.

Sometimes I just sit and think. Other times I just sit.

mattwnz

20157 posts

Uber Geek

#2551446 28-Aug-2020 16:39

eracode:

Almost Catch-22 - you can now afford to service the loan but can’t afford the deposit.

I think traditionally 20% deposit is seen as the norm. However 5% seems to be allowed in some cases with the home loan scheme https://sorted.org.nz/guides/home-buying/buying-a-first-home/#:~:text=Most%20lenders%20will%20require%20a,require%20a%20deposit%20of%205%25. . So that seems to be the way around it in some cases, to allow banks to lend to those who can't save 20%.

driller2000

935 posts

Ultimate Geek

ID Verified

#2551451 28-Aug-2020 16:42

sen8or:

For those that fondly remember investment returns of 8%, don't forget that they also came with mortgage rates of 12-15% or more for borrowers.

Yep that is the flipside to this whole convo:

https://teara.govt.nz/en/graph/23100/interest-rates-1966-2008?__cf_chl_jschl_tk__=aff45835226b4081247451622ba523a1d5b725f3-1598589617-0-AYh4tmxXuz6ZHQgPdpZBLjkjL273QXIq0J3yH5uLxp9CNK7k5VT-E5RIEP5twvlGRSg6SoGcgpbhieDBX5rS7uuOdO7W9BzUg4_gXp6hwa7tg6o-0aEz5XsTJqrNDilwdDsLoI36mt1kY0Q5S4grnID9dCIPpWtP6ptSlM7uSa2hZCP-CMW4C3T-7AkDv8NBXDRzfVW4uamNpnDJEeKAZZ8sokHJTws-3Zj_dYxzoSH5N2_vtu7wzYEzK6Ds8V9kot9ElWtbEAVHc3az0thEe62EizngUoUIupOKSjEhMunWWdF3-gkNX7DU1i-m19exk8VXXjpGRAHprvrwuZxmzoo

1 | 2 | 3 | 4 | 5 | 6