131–140 of 223 posts
I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?
(Usually, greedy businessmen, greedy unions, and speculators are blamed.)
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…
That's not true. I chose to pay an extra £30 a month on my mortgage because I'm not sure rates won't rise over 5 years, and I want to be confident of budgeting for the the next 5 years. I'm confident rates won't go down, but rates going up could affect me. Think of it as insurance. I don't take home insurance because I'm confident my house will burn down, I take it incase my house does burn down
I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?
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…
The "returns" were rarely above the inflation rate, plus you got to pay income tax on those illusory "returns".
Savvier people would shift their money into assets that kept or increased their value independent of inflation, such as equities and real estate.
I'm not familiar with a world where interest rates and inflation aren't low. What should I expect?
As Warren Buffett explains:
"[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line. Conversely, if government interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is this: What an investor should pay today for a dollar to be received tomorrow can only be determined by first looking at the risk-free interest rate.
Consequently, every time the risk-free rate moves by one basis point--by 0.01%--the value of every investment in the country changes. People can see this easily in the case of bonds, whose value is normally affected only by interest rates. In the case of equities or real estate or farms or whatever, other very important variables are almost always at work, and that means the effect of interest rate changes is usually obscured. Nonetheless, the effect--like the invisible pull of gravity--is constantly there."
Source: "Mr. Buffett on the Stock Market," November 22, 1999 -- http://archive.fortune.com/magazines/fortune/fortune_archive...
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…
Precious metal, if held in physical form, has the unique property of being no-one's obligation. Additionally, it is by definition a bearer "instrument" and easily transportable, therefore suitable for mitigating political risk. This is why it performs well in times of crisis. There is no one-size-fits-all answer to your second and further questions. Too much depends on individual circumstances, risk appetite and time…
One would assume based on the casual and confident nature in which people talk about them, that rising inflation should result in X. But if being honest they will also include "ignoring second order effects", which can mitigate or completely reverse the expected outcome. The complexity is monumental.
I believe one could say rising interest rates should reduce the value of existing fixed rate bonds denominated in the same currency. Im not sure a lot else can be said, with confidence. Much else is paradox.
If we experience the same consumer price increases as was experienced through 1980-1990, rents and goods will go up an average of 5.4% each year over a 10-year period.
If it gets as bad as the 1970-1980 CPI then rents, goods and services will rise almost 7.1% a year and will practically double after a 10-year period.
Here are the historical CPI numbers from 1913 to 2017 —(1970 to 1980 was not pretty.)
https://www.minneapolisfed.org/community/financial-and-econo...
Earlier quoted context omitted.
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.
Still having trouble figuring out of being a landlord of a second home is good or bad in this environment. You owe a fixed-rate mortgage, and you're charging rent.
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…
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.
Let's say you refinance from 2% to 6% and your mortgage payment exceed loan to income ratios, you might have to sell your home.