The Era of Very Low Inflation and Interest Rates May Be Near an End • Hacker News Board

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#121

Post by kazinator » Thu, Apr 26, 2018, 10:01 PM UTC

anon84598 wrote: post #100

cyberferret wrote: post #53

Earlier quoted context omitted.

I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Househo…

It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.

No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars.

Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay.

It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term.

(You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.)

Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest.

When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#122

Post by cyberferret » Thu, Apr 26, 2018, 10:05 PM UTC

danieltillett wrote: post #115

cyberferret wrote: post #53

Earlier quoted context omitted.

I recall a time of nearly 20% interest rates here in Australia a few decades ago. As far as I can remember, it was all just business as normal for most people. It all comes down to just how much debt you own. If I recall, people who were highly leveraged or had negatively geared property were hit the hardest. People with actual savings in the bank were actually happy with their interest returns being so high. Househo…

Having lived through the 20% interest days here in Australia it was far from "business as normal". We had a massive recession shortly afterwards, house prices crashed and unemployment went over 10%. I don't think we will ever see 20% interest rates again because the level of debt here in Australia is so much higher now. If interest rates even get to 8% it will be like 1990.

Fair point. I was still only just out of school at that point, and as a young student with little debt, my world view (and that of my friends) would have been different from people who owned property or other investment vehicles that came with interest payments.

EDIT: But I also recall that those times were when high flying business people like Alan Bond etc. were still getting banks to throw money at them even though interest rates were astronomical. A large part of the problem which probably lead to the eventual crash and burn of the economy...

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#123

Post by eCa » Thu, Apr 26, 2018, 10:07 PM UTC

Xylakant wrote: post #113

mattmanser wrote: post #101

Earlier quoted context omitted.

In the UK mortgages aren't fixed for the lifetime of the mortgage. Not sure about the rest of the EU. Ours are like 3/4/5 year fixed rate then revert to a bad variable rate, at which point you get a new mortgage.

In Germany, 10 year fixed mortgages are common, though shorter terms get you lower interest.

In Sweden, lots of mortgages are adjusted every three months, and I would assume (though not certain) that a majority of mortgages are fixed on no more than two-three years.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#124

Post by refurb » Thu, Apr 26, 2018, 10:07 PM UTC

nwatson wrote: post #111

jamie_ca wrote: post #109

Earlier quoted context omitted.

For fixed rate, you'll get hit when you renew at the end of the term (typically 5y). Say you've got a 5 year fixed mortgage, at 3.49%. You buy a new home, taking a $500k mortgage at 25y amortization. That's $2494/mo. At the end of the mortgage, you'll have $431,321 remaining on the loan. Renewing, if you find the fixed-rate amount is up two points to 5.49%, your 20 remaining years now costs you $2950/mo. If you're ta…

That's not a "fixed-rate" mortgage (at least in the U.S.), because fixed-rate mortgages set a fixed interest rate until the entire mortgage principal is paid down to $0. It seems like you're describing a https://en.wikipedia.org/wiki/Balloon_payment_mortgage , where you pay a fixed (or perhaps variable?) rate for a few years, but then need to make a huge balloon payment on that mortgage at the end of the term (usuall…

I think people are getting confused.

Fixed rate means the interest rate doesn't change over the term of the loan. Compare this to variable or floating rates that can change.

The difference for the US is that the fixed rates are for a 30 year term. Countries like Canada and Australia have 10 year terms as a max, with most people electing for something shorter as the rate goes down.

In the US your rate might never change. In other countries it changes when you refinance at the end of the term.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#125

Post by lrem » Thu, Apr 26, 2018, 10:07 PM UTC

lmohseni wrote: post #92

lrem wrote: post #86

Earlier quoted context omitted.

Imagine this was done quickly: 1: everyone who's got a borderline repayable mortgage to get anything in the overheated market and hasn't increased earnings by some 20-30% since then goes bust. This creates a wave of increased supply. 2: everyone's willing to buy gets way less loan amount for same repayments. This severely reduces demand at current prices. 3: 1+2 force prices down, meaning some people end up owning ba…

In your case 1, this refers to people who have variable rate mortgages, correct? What about people who have fixed rates?

They're eternally thankful for living in a country where you can get a fixed rate for more than 5 years.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#126

Post by tedsanders » Thu, Apr 26, 2018, 10:09 PM UTC

mistermann wrote: post #97

mistermann wrote: post #21

Earlier quoted context omitted.

> Property taxes and housing cost (especially rent) has doubled in last 10 years in New York. Same thing in Canada's larger cities (if not a doubling in much less than 10 years), yet we're told the change in the housing component of the CPI is < 2%. Lies, damn lies, and statistics.

Ok this is getting ridiculous, I'm very curious what motive someone would have for downvoting this (other than my username). What is there to disagree with?

My hypotheses for why your comment was downvoted:

* Only two sentences

* Not relevant to the main topic of discussion

* Makes a vague claim

* Unsubstantiated by any source

* Claims that authorities are lying without specifying the particular authorities or particular lie

* Uses a mild swear word

* Resorts to cliche

* Doesn't teach the reader anything new or interesting

* Doesn't reflect any nuance or thoughtfulness

Not saying all these hypotheses are true, but they might explain why your comment was downvoted. I sincerely doubt it has anything to do with your username. Anyway, I hope you don't feel bad about the downvotes. Hopefully your future comments are perceived as contributing more value to readers. :)

Overall the comments on this article feel pretty substandard to me. A fair number of armchair economists are confidently explaining how things are going to unfold and how the system is nefariously rigged. For some reason, it seems the topic of economics brings out a lot of ill-informed speculation presented as fact.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#127

Post by umeshunni » Thu, Apr 26, 2018, 10:12 PM UTC

kazinator wrote: post #121

anon84598 wrote: post #100

Earlier quoted context omitted.

It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.

No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars. Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay. It only makes sense to go fixed rate if you're very sure that the interest will climb over the next ter…

From another comment below:

In the US, fixed rates are for a 30 year term. Countries like Canada and Australia have 10 year terms as a max, with most people electing for something shorter as the rate goes down.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#128

Post by gascan » Thu, Apr 26, 2018, 10:13 PM UTC

jamie_ca wrote: post #109

cortesoft wrote: post #90

Earlier quoted context omitted.

Wait, isn't your number 1 the exact opposite, unless you got a variable rate mortgage? If you got a fixed rate mortgage, inflation is your friend, since inflation will decrease your debt.

For fixed rate, you'll get hit when you renew at the end of the term (typically 5y). Say you've got a 5 year fixed mortgage, at 3.49%. You buy a new home, taking a $500k mortgage at 25y amortization. That's $2494/mo. At the end of the mortgage, you'll have $431,321 remaining on the loan. Renewing, if you find the fixed-rate amount is up two points to 5.49%, your 20 remaining years now costs you $2950/mo. If you're ta…

Guys, don't downvote him. Many parts of the world do it like that- your 30yr mortgage is really a series of 5yr balloon amortized for a 30 year period. They don't have the option of a true 30yr fixed.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#129

Post by rmrm » Thu, Apr 26, 2018, 10:18 PM UTC

nerfhammer wrote: post #117

rmrm wrote: post #65

In a world where inflation is going to go up, what should one invest in? People will often say gold. Which I guess is a proxy for any fixed supply asset. But weve seen price inflation in many things other than gold, such as houses and land, art, stock prices. Most things of lasting value ie not consumables. Does a precious metal have some other special qualities that make it behave poorly relative to other limited va…

if you assume markets price inflation expectations efficiently, the answer is invest in just about anything with a market price or interest rate. Even bonds. Bonds are just the price of money in the future. If the market expects inflation then bond prices will drop accordingly to match it. Just don't stuff money under your mattress or keep it all in a checking account.

I guess bonds, if inflation expectations are constant, as they will drop if expectations rise as you say. Avoiding bonds would be a mechanism to avoid rising expectations.

So I think this is technically correct, if things are static, but does not protect against rising rates, which I guess it my question.

Re: The Era of Very Low Inflation and Interest Rates May Be Near an End

#130

Post by toomuchtodo » Thu, Apr 26, 2018, 10:19 PM UTC

jgalt212 wrote: post #119

justonepost wrote: post #96

Earlier quoted context omitted.

It will also increase the value of your house. Fix rate debt is definetly your friend.

Fixed rate debt may increase the value of your house if interest rates go up and your mortgage is assumable.

Almost no US mortgage products are assumable.