Maturing Mortgage Cap Options
The Sun Herald
Saturday May 9, 1992
Q LAST year I took out a $75,000 State Bank mortgage capped at 12.5pc for one year. The loan matures on May 17 and I must now either repay the loan or select one of three loan options:
* Variable rate - currently 11pc;
* Fixed rate of 11.25pc for three years; or
* Capped at 12.5pc for three years plus immediate payment of a $1,392 cap fee.
I understand there are penalties for paying out a loan early so it probably would not be advantageous to refinance even though I could probably get free legals. The capped loan seems the best option but the fee seems rather high.
In addition, the variable rate of 11pc (which I pay now) seems high compared with the State Bank's 8.75pc offer to new borrowers. What do you think the (home loan) interest rates will be doing during the next three years? I want to make an informed decision.
E K, Westmead.
A REGARDING prophecies, the best I can do is to point out the bank bill rates for progressive futures contracts on the Sydney Futures Exchange which are currently at 6.6pc for the June 1992 contract, and rising to 6.7pc for the December 1992 contract.
For contracts expiring two years from now, the futures market is forecasting 10pc.
This does not guarantee that short-term interest rates will be at that level in two years' time, it simply indicates what futures traders are punting on.
In a nutshell, they see rates rising 3-4pc over two years and if that extends to long-term rates and mortgages, then it will see home loans back up to 14-15pc.
I do foresee a scenario of extreme shortages of capital in the next few years, given the demands in Japan (from bad bank loans), the US (from government deficits), Germany (from rebuilding East Germany) and Russia(catching up after 70 years of neglect).
I cannot say to what level interest rates will rise, although I would not be surprised if the estimates of the futures market prove reasonably accurate
Regarding your options, I think interest rates still have a small way to go down - the real rate of inflation is far too high given that we have only a 3pc rate of inflation.
Let's say home loan rates reach 10pc by the end of the year and we think they are unlikely to get lower.
You can then fix the rates for three years for a fee, probably around 0.5 to 1pc higher than the prevailing variable rate which would mean 10.5 to 11pc
At that stage the standard switching fee is $250, compared to the current special offer of $50. But no capped rate option would be available.
If you want to try to finesse the market, take a variable rate loan now and switch to a fixed rate loan at the next general election on the assumption loan rates will not go lower. If you want to play safe, take the 12.5pc capped rate loan now - you still pay the 11pc variable rate but it will not rise above 12.5pc even if variable rates do.
Refinancing elsewhere is not likely to save much money.
Q CAN you help me with the ANZ? I have two investments: $27,000 in Property Income Trust and $25,000 in Property Trust No 2.
They are now worth $18,504 and $17,505 respectively.
I want to keep the investment safe. What should I do to make the most of my money? I am 55 years old and could leave it there for the next few years if it is likely to pick up - or should I pull it out and try and make up by investing it somewhere else?
Also, for each grandchild born I invest $500 in 12-monthly compound term deposits for them to be drawn when they reach 18. Do you think I should put it into BHP shares or something else? I want it to be safe.
K C, Tumut
A UNIT-HOLDERS in the $35m ANZ Property Income Trust, an old AFT fund, with only three buildings remaining as assets, held a meeting on May 1 and, I believe voted to wind up the fund in three years.
The ANZ Property Trust No 2 held a meeting the week before and unitholders voted to terminate in three years, as have another 15 of ANZ's 18 property trusts.
In that period, there will be no redemptions apart for hardship cases.
If the world economy worsens as a result of the Japanese sharemarket crash, then do not expect property prices in Australia to be significantly higher then than they are now.
For your grandchildren's money, keep on using the compound term deposits. Now is not the time to be investing in shares for the long term, even though the market may shoot ahead for some months.
World markets are forming "tops" and what you might make between now and an eventual peak may well be lost in the ensuing fall.
© 1992 The Sun Herald