News - 17 November 2008

The Alpha Update

Should I Break My Fixed Rate??

The short answer is probably "yes". With interest rates definitely on the way down and likely to fall further, readers with fixed interest rates above 8.75% will most likely benefit from breaking their fixed rate now. Yes, there will be a cost involved (which your lender will be able to calculate for you), but the longer term benefit of a much lower rate going forward will mitigate that cost and should save you further money.

Two Questions arise for most people...How does the lender calculate the break cost? and How do I calculate if this is going to be worth it for me?

Firstly, break costs. In simple terms, the lender charges you a break cost based on the difference between what you are paying and what they can relend the money for today, for the length of time your fixed rate still has to run. EG: $100,000 loan, fixed for 3 years at 9.25%, with 2 years left on the fixed rate. Current fixed rate for 2 year loans is (say) 7.75%.

Calculation is: $100,000 x 1.5% (9.25-7.75) x 2 years (still to run). Thus the break cost is roughly $3000. Lenders can and do add fees for breaking, but this gives you a workable approximation

Secondly, calculating the cost benefit. Essentially, you need to work out the "cost" of staying at the higher interest rate for the remainder of your fixed term, versus the "benefit" of fixing (or floating) at a lower rate for that same period, after subtracting the break fee. A view on where interest rates are going comes into this formula as well.

I have developed a quick calculator to give you a rough guide as to the cost/benefit equation. Email me if you want a copy....... stuart@alphagroup.co.nz

Who do you know who needs help with their fixed rate decisions? Get them to Call Us Today on 021 676 747 or 0800 676 747 for a review of their situation.

Food for Thought

"Drive thy business or it will drive thee." Benjamin Franklin

What's New??

• Interest Rate Reductions expected
• Fewer lenders and more cautious credit policy

If you or anyone you know wants to know more about any of these products, email Stuart@alphagroup.co.nz

Interest Rate and Currency Comments

The election is over and, most importantly, we have a new Government that has been established quickly so that they can get on with tackling the major issue of the economy. International markets continue to create uncertainty and global redundancies are being felt in NZ as well. The Reserve Bank is likely to cut interest rates substantially on 4 December, with some commentators now calling for a further 1% reduction in the Official Cash Rate to bolster our economy. Lenders continue to slowly bring their lending rates down as retail deposit rates fall.

International pressure continues on the currency, with one bank economist predicting the kiwi at 45 cents US next year and 80 cents against the aussie! The downward trend for the kiwi will continue whilst international investors face major uncertainties in their home markets.

(See below for latest interest and exchange rates).

The Finance Markets

As of 8am on Monday 17 November 2008 the following Interest Rates applied:
Official cash rate 6.50% (stable)
90 day bill rate 6.40% (down substantially)
5 year swap rate 6.16% (down)
NZ/US Dollar 0.5620 (down)

Current Range of Interest Rates for home and investment mortgages as at 17 November 2008

Floating:
8.70 to 10.60% (stable)

Fixed For:
1 Year - 7.69% to 9.96% (down slightly)
2 Year - 7.78% to 9.85% (stable)
3 Year - 8.20% to 9.85% (stable)
4 Year - 8.50% to 9.72% (stable)
5 Year - 8.60% to 9.43% (stable)

For a complete table of interest and exchange rates, click here.

The information stated herein was correct at the time of release, but is subject to changes without notice.