20-year loans at a fixed interest rate of zero (in Denmark)

A taste of thing to come?

https://www.smh.com.au/business/ban...ed-interest-rate-of-zero-20210106-p56rzj.html

 

Repayments are already easy at 2%. It's the Principal component (for those who have to pay it), that's a killer.

 

It will be better when interest rates are negative. You could instruct the bank to use the interest payments to pay down principal.

 

I hadn't thought of that but.... great point

 

The way loan amortisation works, though..... usually you pay the interest rate + approx 2% for 25 years. At the end, most of that payment is principal. So at 2% interest, that's about 2+2 = 4% repayments a year.

But if the assumed rate is zero, doesn't that mean you would have to pay 0+4% a year to fully repay the loan in 25 years? There are no 'extra' repayments at the back end to cover more principal.

Weirdly enough an investor (who can deduct interest for tax) might actually be worse off? Can mortgage brokers poke holes in this?

 

Do does this mean the banks literally have nothing better to do with their money for 20 years than lend it for free? Clearly not, so why do it?

Are there exorbitant monthly account keeping fees?
Is the government subsidising the loans to keep banks lending?

This is an area I haven't really looked into, so forgive me if I am missing something....???

 

And I thought my mate who got 0.68% over 15 years (in Germany) had a good deal...

 

Central banks are lending money at negative rates. The banks put their normal margin on this and lend to the mortgagee.

 

Its about that rate here for 10 year in Switzerland too, and even less for a shorter fixed term. Problem here being that 20% deposit is a must, followed by still being able to pay the mortgage at a hypothetical 5% interest rate - the qualification criteria. Additionally, you wont find much in terms of lets say 350m2 land component with house under 1.5M AUD.

 

It's not for you or me. Rates are low because without low rates, almost every government on the planet, at least the Western ones, are bankrupt. Low rates keeps the music playing for a bit longer, and it keeps the government programs rolling on ... until it stops of course.

I was just listening to a Jim Rickards (author of Currency Wars and other best sellers), and he was claiming that rates are way too high at the moment. His context was the US where if they want to inflate away $22trln in debt and debase the currency, they need to get to real rates of about -4-5% to have any impact. Interesting.

 

I'm hearing a lot of people believe ScoMo and Frydenberg have turned into socialists from the amount of money they are recklessly spending to prop up their mates! How much money have we spent?

 

hmmm, that IS interesting...

The economics is way to complicated for me, but if Central banks were paying banks in excess of negative 5% to take funds. The governments would be taking on more debt just to pay interest on the funds they lent, in the hope of generating high inflation to inflate away the original debt. Meanwhile increasing the total debt that needs to be inflated away...
I wonder what kind of inflation rate the above would create/need to be successful.

 

I don't think it works. Japan has been doing this for 30 years with no success.

The problem is we have so much debt, no one knows what to do. As we are not allowed to have recessions (or a depression) anymore the only way to fix an economy faltering due to excessive debt is to put more debt into the system. A bit like a heroin addict, the withdrawal symptoms are too bad to fathom, so just keep giving them heroin.

World Economy Faces Debt Doom Loop, More Inequity Post Pandemic

As the economy becomes more distorted and push to the extremes, it will only take one mistake and the world will go into depression. It could be as simple as civil unrest.

 

Probably less than we would have lost without intervention. Plus the money is so cheap for the government to borrow, the payments are easily covered by keeping the economy going.

Which goes back to your comment below and linked article. The theory makes sense, until it doesn't...

 

In terms of what this means for us as property investors: again referencing Jim Rickards.

Interest rates minus inflation would be slightly negative. Add in that the tax deductibility of finance (property investors can tax deduct the interest on their loans), and the real cost of capital for the average Australian property investor is around -8%.

It's worth considering when people complain about yield in the big capitals or that residential real estate is not worth investing in. It's a beautiful thing.

 

So you you still think its worth playing chicken with interest rates, or should you be deleveraging your portfolio?

There is an excellent article in the AFR today - Why investors are playing chicken with interest rates

The current belief is we are in a "fully-fledged epic bubble", and according to Jeremy Grantham, "This bubble will burst in due time, no matter how hard the Fed tries to support it."

As many investors are finding out in the eastern states, they are left with properties with no tenants and no one to service the mortgage.

When this 'epic' bubble pops, hundreds of thousand more renters will be without jobs.

The financial advice I'm getting at the moment from my advisor is to use the ultra low interest rates to deleverage as quick as you can. If you have multiple properties, maybe sell a couple.

When the bubble eventually pops, you don't want a huge mortgage on your IPs no matter what the real capital cost to the average Australian property investor is, even if it is -8%, and with no ability to service them!! Otherwise the bank will reposes.

What you want is fully owned property and low holding costs. The tide has changed, its not about making the most of tax incentives. Its now about capital preservation.

 

Impossible to answer such an individualised questions as whether or not to deleverage. Though I appreciate that this is the $50m question.

What I would say, is that central banks have a stated policy of inflation (which destroys debt and inflates assets) with no end in sight. Their aim is to default on the debt via currency debasement. My suggestion is to not fight the tide: having some debt will be very useful, particularly if it is against a physical asset like residential real estate.

Put another way, inflation is a wealth transfer towards debtors. So if the stated policy is inflation, you can draw your own conclusion.

Whether people should use this time to deleverage I think depends on the circumstances of that individual in consideration of what there current LVR is.

 

I think what this article incorrectly assumes, is that interest rates will rise and catch out those who are over indebted. This is of course possible. But in the current context, interest rates can't increase without bankrupting sovereigns. Moreover, the Fed has expressly said that they will let inflation run over their target without raising rates. It could be a long time before rates increase. I would be looking for a currency meltdown before any round of interest rate increases. Could be wrong, so best to hedge yourself for either eventuality.

 

Are you saying current cost of capital is -8%?
Would you mind explaining this further?

 

What a great idea.
Where do I sign my soul? Point me to that direction please.