How to play the interest rate game - part 2

In the last blog we discussed how OCR works and the way the Reserve Bank’s handling of it can affect interest rates. We continue this time looking further at how to manage our rates of interest to our advantage.

Floating rates

If your existing loans are on floating rates right now, you might choose to continue along this path if you think New Zealand’s economy will be long and slow in growing.  Of course if you hold this view, you’ll be expecting interest rates to stay low and the OCR not to rise as quickly or as high as was previously envisaged. You will recall the Reserve Bank has recently indicated this. 

You might also continue to float if you think the global situation (especially in Europe) will deteriorate. Why would you do this? Well a deteriorating global situation could lead to a decrease in the rates our banks pay to pick money up off shore. If banks have to pay less to get the moolah that they on-lend to us, then perhaps they won’t charge us so much for the pleasure of borrowing it off them, eg fixed rates will come down.

If you are in the lucky position of being able to pay off  some of the money you owe the bank on your existing loans, you would probably also choose to float as if you fix your loans you may incur penalties for making early repayments.
 
Finally, you might be in the enviable camp of not having a large loan balance owing to the bank or you might not be too adverse to risk or worry about having some uncertainty in your life. If this is the case, you will probably keep your existing loans on floating.

Fixed rates

If you are thinking you might fix your interest rates on your loans right now you are probably of the mind that the International Monetary Fund growth forecasts will come true.  Likewise, I expect you will believe the New Zealand economy is going to experience fairly rapid growth and inflation in the near future.