Interest rates are falling at a phenomenal rate. Retail, prime mortgage rates today are around the 6% mark for fixed rates and close to 7% for variable. Break costs are outrageously high with many borrowers wondering if it is worth their while to break their loan. The banks will simply pass on their losses to the borrower on breaking.

Most economists are expecting that the OCR will fall further with some predicting that it will get as low as 2%. In June 2008 the OCR was 8.25% and now it is 3.5%. In general terms it is a good idea to break your loan. Individual circumstances will vary enormously and you should discuss your specific situation with a good mortgage broker or financial adviser. However it looks likely that retail interest rates will drop to historically low levels and in my opinion it is unlikely that they will stay their long. The strategy for all borrowers at this time should be to hold on to a variable rate and wait for a really low long term fixed rate (perhaps 5% for 5 years?), lock in and batten down the hatches for the inflationary storm or worse crisis that is on its way.

Why so pessimistic? Well think about what is going on around the world. Central governments are bailing out whole industries that would otherwise fail. The money for this is simply being printed by central banks or the Federal Reserve in the case of the U.S. Currency is not backed by any tangible asset (such as gold) any more and therefore only has perceived value. If we take a close look at the situation in the U.S. as an example. Faced with the prospect of massive unemployment that may lead to a global depression, the U.S. instead steps in and rescues industries. Protecting U.S. interests is well entrenched. Free trade deals with the U.S. are not available for the simple reason that U.S. industries are not globally competitive.

How much value should one therefore place on the U.S. dollar? The Federal Reserve keeps printing more of it to pump in to industries that would otherwise fail so that 4.5% of the world’s population can continue to enjoy a higher standard of living (economically speaking) than the remaining 95.5%.

Wealth has to be somewhere and most of it is either in property shares or cash. With increase in supply of money in a low interest rate environment who would want to hold cash? Demand will shift to tangibles and this demand creates inflation.

Inflation will however create an increase in New Zealand property values. My guess is that by the end of 2009 the market will see an increase in demand for all classes of property in New Zealand with this winter is the optimal time to buy more. Don’t miss the bus!

I am happy to respond to any questions on this article or anything in previous issues. Send your questions to mortgages@nzij.co.nz