Trump rate hype: Time to lock in mortgage rates?


With Trump’s election hype in interest rates (2.25% vs 1.7% before election on the US 10 year yield) many people are wondering if its a good time to lock-in long term rates ahead of a possible rate hiking cycle.

So far mortgage rates haven’t gone up and are still at historical lows but with Government yields going up worldwide, how long will it take for mortgage rates to follow? If the yield spike proves sustainable..mortgage rates will inevitably follow. But I do not believe they will, and here’s why:

Let’s look at MoneyYou mortgage rates as of Nov 16th:

screenshot-2016-11-16-09-59-59

Why would fixing rates for 10 years be 25bps lower than floating? Wouldn’t you expect to see them higher? Floating rates have always been LOWER than fixed, not HIGHER. You ought to ask yourself, why would that be? Whats the catch?

If you actually go to a bank now, the sales person pushes hard for you to choose 10-year fixed and not the floating. Why? Because they’re told to do so by management in order to maximise the bank’s profits. Banks know the average person only does business with the bank every 10 years or so when’s time to re-mortgage the house. So there’s no recurrent business, there’s really no need to please or satisfy the customer. By the time you come back 10 years later, the mortgage broker is gone, the physical branch gone, the bank itself might be gone too. Pleasing a mortgage holder customer is really not the priority.

Psychology behind decision: 

When you lock in rates for 10 years it always feels you’ve got a great deal. You sleep better, have less anxiety, and genuinely think you got the better hand of the deal. But remember, this is a zero sum game, your profits are someone else’s losses and vice versa. And generally its the professionals (banks) that get the better hand, not the amateurs (clients). I’m sure if you ask the people that locked rates in 2006-07 they thought they were getting really good deals. Same with me when I locked in rates in 2014 @ 2.85% for 5 years. 2 years on and I already look pretty stupid.. And the same will happen today. Its tempting to lock 10 year rates at 1.65% because its already a pretty low rate .. but within 2-3 years there’s a high likelihood that rates will be 0.5-1% range and you’ll be paying 2/3 times more in interest costs.

But how do I know when rates might be reversing and turning higher?

The way I’ll do is to monitor closely the spread between 10 year fixed and floating rate (circled in red).

screenshot-2016-11-16-09-59-59

The moment this gap starts to narrow or it gets to zero .. is probably a good time to lock rates for 10+ years, but I expect that NOT to happen in the next few years/decades.

Interest rates will have to stay low and go down to keep the economic system alive and keep enormous debts serviceable. Rates could only go up sustainably if we’d have strong inflation or growth, in which case your salary/income should also increase proportionally. And if inflation really gets out of hand .. well, that’s even better because it would wipe out your debts. Also the establishment’s strategy to grow our way out of debt is financial repression, which essentially means rates will stay lower than inflation for decades to come. That means in the eventuality that rates rise and your debt costs rise .. they will rise less than inflation, meaning less than your income (assuming your income grows in line with inflation, of course).

Could mortgage rates go up temporarily for a few months? Sure they could. But they would resume the trend back down pretty soon again as they’ve done in the last 30 years. Nothing goes down in a straight line, there’s always bumps along the way .. and this is just another Trump bump.

screenshot-2016-11-16-10-30-41

The temporary rises in the long term downward trend in rates .. are nothing more than an opportunity to make money out of people’s fears. Many people jump the gun at the first signs that rates might reverse course .. and of course banks/investors love it as they “steal” money away from the mortgage holder.

Imagine this for a second: Japan already pays close to 50% of its entire Government budget to service its debts at close to zero rates. Imagine if rates would normalise and go up .. Japan (and the rest of the Western world) would collapse. Don’t get intimidated by this sudden Trump rise. Hold your ground, be brave and don’t look for immediate gratification by locking rates.

Final notes:

1. This strategy isn’t for everyone. If you can’t afford at all any sudden interest rate spike (i.e. if have high debt service costs relative to your income and little savings/liquidity) then you should NOT go for floating. You don’t want to end up having to sell your house/car/ business to keep up with interest payments.

2. If you’re really uncomfortable with the risk and you can’t sleep at night .. then lock in rates. In the end nothing is more important than your sleep, reducing your stress/anxiety levels and have a happy life.

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