Hi, I note the opinion on being fully hedged on one’s mortgage, but realistically I don’t believe there are that many long range fixes on offer in the Irish market - open to correction
Good podcast as usual, your comments on the lag effects with interest rate policy seem to be spot on, the bond market is now suggesting that CBs are over-doing it and I saw an FT piece (Andy Haldane) at the weekend saying similar things re the UK, the Central Banks need to wait now and watch the higher rates take effect or inflict unnecessary pain.
On the future mortgage rates, I would add some points to the contrary (mainly because this is how I rationalised it having remortgaged for a house build at the turn of the year):
- it’s not quite as simple as a bet on future interest rates. It’s a bet against market expectations of future interests rates will not bear out. The yield curve is heavily inverted which implies that average market expectations are that interest rates will indeed some back down
- if that bet does not come back down it will be because inflation is sticky. If inflation is sticky it will be due to wage inflation, which skilled people of working age will be beneficiaries of.
- the mortgage market for long term fixed rates was very good if you had a very low LTV ratio, which usually means you’re in your late 40’s at least or you have rich parents. When you look at what’s available for first time buyers and trader uppers with higher LTVs, you saw around a 1% jump in rates going from a 5 year fixed rate to a 7 year fixed rate. Now you may be happy to pay an extra 1% over 5 years just to have certainty for an additional 2 years, but that isn’t a slam dunk argument I don’t think.
- alongside the inverted yield curve you also have a trend of mortgage providers not passing interest rate rises on to mortgages, instead screwing the savers. I’m not sure how long that would continue.
All good points. Don't disagree - the situation is more nuanced, which is why I am not a mortgage adviser. I would add that you come at the question from the perspective of one who is financially sophisticated. You would struggle to explain your comment to the average person thinking about getting a mortgage. So, the question becomes, what advice would you give to the average punter? By 'average punter' I mean someone who cannot be expected to be financially sophisticated, it is not a judgemental remark. Indeed, is the average punter equipped to make this very important decision?
Indeed it’s a fair point. The average punter cannot be expected to weigh up all the complexities. Likewise when it comes to investment advice for one’s pension, I would never advise the average Joe to do what I’m doing because I follow such matters and my opinion today could change quite rapidly.
If advising the average Joe with a LTV of 80% today however, I wouldn’t advise them to lock in for as long as they could. Assuming I had to give advice of course, I could leave it as I don’t know.
The 5 year mortgage rates in ireland are around 3.7% whereas the 10 year rates are 4.5%. So that’s paying an additional cost of 0.8% over 5 years to box you into 4.5% for years 5 to 10, when the market expects rates to be lower by then. Now they could be wrong of course and the world changes around us, but at present who is to say the markets are more likely to be wrong in one direction rather than the other? Rates could absolutely plummet 5 years from now and there’s good reason to think they might. The average probability implied by the market is the rates will at least be a good bit lower than they are today.
If the average Joe had LTV of 60% of less, they’ve a lot more options open to them to get good long term rates. Over time I have to believe that the old dinosaurs dropping out of the market and new entrants from the fintech sector will herald in more competitive options for punters.
Your reply, I think, suggests a view about the future path of interest rates. It's one I happen to agree with. There are plenty of good reasons to think that rates, over time, are going to come down again. At the end of the day though, it's just another interest rate forecast that could be wrong. But probably isn't!
I think any arm chair commentator such as me could cobble together an argument why we think interest rates are going to go in this or that direction. But I place more solace in what the interest rate swap market implies future rates will be than those forecast. Because at the very least that’s based on where investors are putting their money and it reflects the closest thing you can get to a true market based best estimate forecast. And those market forward rates are all pointing downwards in the future. On top of this best estimate you then apply the what ifs, adjusting upwards or downwards from that base.
The bit that isn’t market observable is the link between market rates and the Irish mortgage market, which introduces questions around competitiveness etc..
Hi, I note the opinion on being fully hedged on one’s mortgage, but realistically I don’t believe there are that many long range fixes on offer in the Irish market - open to correction
Probably correct. If so, the regulator should instruct financial institutions accordingly.
Good podcast as usual, your comments on the lag effects with interest rate policy seem to be spot on, the bond market is now suggesting that CBs are over-doing it and I saw an FT piece (Andy Haldane) at the weekend saying similar things re the UK, the Central Banks need to wait now and watch the higher rates take effect or inflict unnecessary pain.
https://www.reuters.com/markets/rates-bonds/bond-markets-reckon-central-bank-policy-error-is-cards-2023-07-03/
Thanks Ciaran - yes, I saw that Haldane article. He really was a loss to the Bank of England.
I saw today from imf that corporate profits are the largest single driver of inflation now. Can that be discussed in a podcast?
Interesting discussion as always.
On the future mortgage rates, I would add some points to the contrary (mainly because this is how I rationalised it having remortgaged for a house build at the turn of the year):
- it’s not quite as simple as a bet on future interest rates. It’s a bet against market expectations of future interests rates will not bear out. The yield curve is heavily inverted which implies that average market expectations are that interest rates will indeed some back down
- if that bet does not come back down it will be because inflation is sticky. If inflation is sticky it will be due to wage inflation, which skilled people of working age will be beneficiaries of.
- the mortgage market for long term fixed rates was very good if you had a very low LTV ratio, which usually means you’re in your late 40’s at least or you have rich parents. When you look at what’s available for first time buyers and trader uppers with higher LTVs, you saw around a 1% jump in rates going from a 5 year fixed rate to a 7 year fixed rate. Now you may be happy to pay an extra 1% over 5 years just to have certainty for an additional 2 years, but that isn’t a slam dunk argument I don’t think.
- alongside the inverted yield curve you also have a trend of mortgage providers not passing interest rate rises on to mortgages, instead screwing the savers. I’m not sure how long that would continue.
All good points. Don't disagree - the situation is more nuanced, which is why I am not a mortgage adviser. I would add that you come at the question from the perspective of one who is financially sophisticated. You would struggle to explain your comment to the average person thinking about getting a mortgage. So, the question becomes, what advice would you give to the average punter? By 'average punter' I mean someone who cannot be expected to be financially sophisticated, it is not a judgemental remark. Indeed, is the average punter equipped to make this very important decision?
Indeed it’s a fair point. The average punter cannot be expected to weigh up all the complexities. Likewise when it comes to investment advice for one’s pension, I would never advise the average Joe to do what I’m doing because I follow such matters and my opinion today could change quite rapidly.
If advising the average Joe with a LTV of 80% today however, I wouldn’t advise them to lock in for as long as they could. Assuming I had to give advice of course, I could leave it as I don’t know.
The 5 year mortgage rates in ireland are around 3.7% whereas the 10 year rates are 4.5%. So that’s paying an additional cost of 0.8% over 5 years to box you into 4.5% for years 5 to 10, when the market expects rates to be lower by then. Now they could be wrong of course and the world changes around us, but at present who is to say the markets are more likely to be wrong in one direction rather than the other? Rates could absolutely plummet 5 years from now and there’s good reason to think they might. The average probability implied by the market is the rates will at least be a good bit lower than they are today.
If the average Joe had LTV of 60% of less, they’ve a lot more options open to them to get good long term rates. Over time I have to believe that the old dinosaurs dropping out of the market and new entrants from the fintech sector will herald in more competitive options for punters.
Your reply, I think, suggests a view about the future path of interest rates. It's one I happen to agree with. There are plenty of good reasons to think that rates, over time, are going to come down again. At the end of the day though, it's just another interest rate forecast that could be wrong. But probably isn't!
I think any arm chair commentator such as me could cobble together an argument why we think interest rates are going to go in this or that direction. But I place more solace in what the interest rate swap market implies future rates will be than those forecast. Because at the very least that’s based on where investors are putting their money and it reflects the closest thing you can get to a true market based best estimate forecast. And those market forward rates are all pointing downwards in the future. On top of this best estimate you then apply the what ifs, adjusting upwards or downwards from that base.
The bit that isn’t market observable is the link between market rates and the Irish mortgage market, which introduces questions around competitiveness etc..