The cost of high interest rates
October 29th, 2005 at 8:58 am by David FarrarMortgage rates have just gone up to 9.3%, making them amongst the highest in the developed world. They may yet reach 10%.
Six years ago the average floating rate was 6.5%. Now for those without a mortgage, the difference may not be easy to relate to, so here are some statistics.
If you have a $300,000 mortgage, then extra interest compared to six years ago is $161 a week net.
Taking again the $300,000 mortgage, if you are repaying a fixed amount per week of $600, then you will pay your mortgage off in around 16 years at 6.5% interest.
At 9.3% interest, the mortgage will take 25 years to repay. And the extra repayments will come to around $280,000.
So that 2.8% extra interest rate can cost a family with a $300,000 mortgage around $280,000.
No tag for this post.
October 29th, 2005 at 9:20 am
With inflation at 4% then the true interest rate is really 5.3%. When the floating rate was 6.3% and inflation at 1% the interest rates are the same.
Vote:October 29th, 2005 at 10:26 am
Six years ago when Don Brash was goverator and there was steadily decreasing interest rates, before the Labour Government went on a spending binge.
Vote:October 29th, 2005 at 10:28 am
So that makes it alright then does it Simon?
How’s your real income going there?
you might want to up the financial literacy a bit before trying that sort of fatuous comparison next time.
Vote:October 29th, 2005 at 10:38 am
The banks are going to do well out of this. They buy a lot of their money offshore, at low rates, so they have been given an extra margin for free. Nice work if you can get it.
Vote:Many homeowners might be fixed, so ok for the short term, but it is going to hammer business borrowings and the economy, which is a bit shaky anyway. The cash rate is a blunt instrument, which is increasingly less effective these days.
I wonder how this will affect movement overseas? People looking at the outgoings here and looking offshore and seeing more money left at the end of the day.
Regarding iinflation – my income has consistently been been goin backwards fo ryears. Pay rises have been less than the rate of inflation – the joys of working for a small business at the time. The only people getting ahead of that game are the pollytubbies and those under the wing of the Higher Sallaries Commisssion, where huge pay rises and performance are not linked
Geoff
October 29th, 2005 at 10:49 am
DPF: this is a problem, no argument, the focus should be on what done – there are very few tools available, particularly when a significant part of the problem is offshore expectations about NZs currency. I’m interested in what you think the range of solutions might be and whether or not tax cuts are amongst them?
Vote:October 29th, 2005 at 10:54 am
Well tax cuts are less inflationary than extra spending. The main thing the Government should do for now is to restrain its own spending.
Vote:October 29th, 2005 at 11:05 am
Dr Sullen was half right. We got the interest rate increase, unfortunately we didn’t get the tax cuts he said would go with it…
Vote:October 29th, 2005 at 11:24 am
Chill Nigel don
Vote:October 29th, 2005 at 11:51 am
DPF: I don’t agree that tax cuts are necessarily less inflationary than government spending but agree that government should limit spending – that said, isn’t it generally accepted that domestic consumption/debt is a big part of the current situation?
Going back to our discussion yesterday, what tools do we have since the OCR apparently isn’t sufficient, at least at the moment, to constrain domestic spending – I think part of the solution is the savings initiative mooted by Cullen but accept that this is only one part of a larger jigsaw.
Vote:October 29th, 2005 at 12:39 pm
No mortgage here (no house, either) but I can definitely think of better times to be be getting paid in $US!
Vote:October 29th, 2005 at 1:46 pm
Paul – you may not agree, but almost every economist in this area will state it is a fact. That is because a proportion of tax cuts will be saved.
Vote:October 29th, 2005 at 2:36 pm
Tim check out the RBNZ interest rate chart, the rates fluctuated over Dons time as ‘Goverator’.
You and DPF must go to the same revisionist History classes, DPF said that slavery was abolished ‘early’ in the 1800′s in the USA – it was actually 1864.
Vote:TB says interest rates declined under DB at the Reserve bank, yes the rate was over 14% in 1990 and fell to just above 4% in 1994 and then rose AND fell for the next 10 years under Don
http://www.rbnz.govt.nz/keygraphs/Fig7.html
October 29th, 2005 at 2:52 pm
Of course as we know the whole idea is to slow the property market with an interest rate hike & a talk of a further one this Dec.
Vote:We sold some properties and couldn’t believe the prices we received at Auction. I felt sorry for some of the people that purchased and didn’t believe they did the math properly. I also believe that properties will be back on the market, including mortgagee sales, after Xmas.
But again I know a few are hoping for a property crash, and a buy up at fire sale prices. Leaving the poor souls who were so hyped up with property fever, losing their shirt and Bankrupt.
October 29th, 2005 at 4:07 pm
If it takes the steam out of the property market, that’s probably a good thing. It’s gone crazy in the last few years. Higher interest will mean less affordable mortgages, will mean less crazy price rises. It can always be put back down, and I’m surprised it wasn’t put up much sooner. But then there’s still a hangover from monetarism that persists like a stain in the bowl, saying that it’s immoral to have high interest rates, rather than simply a matter of practicality in the hands of the RBG.
Vote:October 29th, 2005 at 5:18 pm
Well we have to hang out for three years until we score that 75cents a week tax-cut.If Cullen restrains his spending to the same as the past 6 years the rate should increase to about 11.5%
Vote:October 29th, 2005 at 7:45 pm
DPF: that’s a little overstated – many were unequivocal in their views on National’s tax cuts which would have put enormous pressure on inflation.
NZ has an appalling rate of savings; why would this change without some incentive? Plus, consumer expenditure/debt is historically high – yours is an abstract argument about some hypothetical situation that simply doesn’t apply here and now. Yes a percentage of tax cuts will be saved, but in the current environment they’re reckless.
Don’t assume I’m opposed to tax cuts, I’m not – and in this instance, it’s sequencing and pacing issue, not a policy one.
Vote:October 29th, 2005 at 9:54 pm
Given that all us lefties are finacially illiterate, I wonder if some kind right wing wizard could explain the meaning of this:
The current account deficit continues to increase
The continued strength of the domestic economy and the associated import demand, together with subdued export growth, continue to be reflected in further increases in the current account deficit. In the June quarter the annual current account deficit widened to $11.9 billion or 8.0% of GDP from a revised 7.4% of GDP in the March quarter.
The surplus on services decreased from $978 million in the year to March 2005 to $887 million in the year to June 2005. The annual deficit on goods increased from $2,411 million in the March quarter to $3,006 million in the June quarter. The largest component of the current account deficit, the deficit on investment income, increased in annual terms to $10,267 million in the June quarter from $9,965 million in the March quarter.
What I want to know is, what is “investment income”? To my simple mind it means non-New Zealanders own a large chunk of our economy (eg banks) and keep exporting their excellent profits overseas. Hence their desire to keep the NZ dollar overvalued with high interest rates. But there must be a better explanation than this surely?
http://www.treasury.govt.nz/mei/sep05/
Vote:October 30th, 2005 at 4:20 am
I thought the reserve bank governer was supposed to keep inflation below 3%? It’s 4% now and climbing. He should have raised the OCR months ago. Or is he under Labour’s thumb and wasn’t allowed to do that before an election?
Vote:October 30th, 2005 at 12:53 pm
Not too sure that many people would be saving their tax cuts. Last time taxes were cut by the nats in the 90′s private savings rates actually decreased. Tax cuts still would have caused far more inflation than Labour’s increased spending plans. If higher interest rates do anything I hope it makes people take stock and stop spending beyond far their means.
Vote:October 30th, 2005 at 4:22 pm
Logix…When Cullen introduces his forecast Capital Gains Tax on overseas investments, you will see a repatriation of those investments from overseas probably into NZ Property assets distorting their values.It will improve then current account in the very short term but will make it even worse on a continuing basis as overseas returns on NZ held investments decrease on a continuing basis, while many will spend their repatriated funds on new cars and other luxury imported goods.
Vote:October 31st, 2005 at 4:01 pm
Logic asks: ‘What I want to know is, what is “investment income”? To my simple mind it means non-New Zealanders own a large chunk of our economy (eg banks)’
Well, yes. That’s where the large Telecom dividends go. We sold a monopoly overseas, and now we ship the cash out. (I’m not opposed to overseas investment in NZ – it’s the monopoly bit that rankles).
But also that’s my mortgage payments. I owe the bank, they owe an overseas bank at a slightly better rate, with forward currency deals to cover them against currency changes.
This is where the property market gets silly: NZ property prices have gone way up, so we’ve got bigger mortgages, and so we owe lots more dosh overseas.
Net result: the houses and properties are still the same, we just owe much more money overseas.
Vote: