FTB's vs interest rate rises

[soma]

Have to agree with the previous post, a colleague of mine is looking to buy now and I asked her what she would do if interest rates went up by 1%, would it influence the amount they would borrow etc. This questioning was met with a shrug of the shoulders!!!!!!

I've met mortgage holders who thought a 0.25% interest rate rise meant that their monthly mortgage payments would rise 0.25%!! (i.e. A holder with a €1000 mortgage was going to be paying 1002.50/mth!)

This happened twice - it does not bode well for the state of financial literacy of the nation.

 

[Eurofan]

I've met mortgage holders who thought a 0.25% interest rate rise meant that their monthly mortgage payments would rise 0.25%!! (i.e. A holder with a €1000 mortgage was going to be paying 1002.50/mth!)

This happened twice - it does not bode well for the state of financial literacy of the nation.

I've had a similar conversation with a few people recently where they hear .25% increase and assume thats roughly how much the repayment will rise by (i.e. not enough to worry about).

I don't think interest rate rises have gotton to the point where they're biting yet but i feel that will change.

Using Karls mortage calculator i just did the maths on something i find interesting though.

Generally 'affordability' is bandied about as the all important sum, i.e. whats your wage etc. and we'll tell you what the max amount you can 'afford' to repay each month.

Taking a sum of €300k over 35 years @3.1% works out at €1171.35 per month.

But now (before any future increases) 35 years @3.6% with roughly the same per month 'affordability' means you're only getting €279k for €1169.30 per month.

In other words today real mortgage affordability is already down 7%!.

 

[anseo]

had to laugh at this one:

[broken link removed]

[FONT=Verdana, Arial, Helvetica, sans-serif] It is a disgrace to put up interest rates, especially for new people starting off and it will affect me.
Marie, Co Monaghan [/FONT]

 

[bearishbull]

had to laugh at this one:

[broken link removed]

[FONT=Verdana, Arial, Helvetica, sans-serif]It is a disgrace to put up interest rates, especially for new people starting off and it will affect me.
Marie, Co Monaghan [/FONT]

ha ha , "it will affect me me me me"(in broad monaghan accent!!). it was a disgrace that rates were so low in our high growth economy which fuelled the house price bubble and allowed rampant inflation in this economy.

 

[darex]

As a potential FTB the predicted rise in interest rates would have an impact. A couple of weeks ago was thinking of taking the plunge (against my better judgement) but am now thinking of renting for a while.
Problem is as a FTB you are caught between a rock and a hard place - see prices rise by another 50 K every few months, or take on a mortgage that will screw you with negative equity if there is a bust.

Does anyone know of a good way to hedge against further rises as a FTB without actually buying?

 

[Theo]

As a potential FTB the predicted rise in interest rates would have an impact. A couple of weeks ago was thinking of taking the plunge (against my better judgement) but am now thinking of renting for a while.
Problem is as a FTB you are caught between a rock and a hard place - see prices rise by another 50 K every few months, or take on a mortgage that will screw you with negative equity if there is a bust.

Does anyone know of a good way to hedge against further rises as a FTB without actually buying?

Lease option contracts when renting have been common in the US and starting to come here. The idea is that the landlord grants the renter an option to purchase the property at a fixed price in 5 years in exchange for paying a premium over and above market rent. If prices crash in 5 years, the renter doesn't exercise the option, if prices go up, the renter can get a good deal. The advantage for the landlord is higher yields plus greater certainty about investment exit.

 

[darex]

Lease option contracts when renting have been common in the US and starting to come here. The idea is that the landlord grants the renter an option to purchase the property at a fixed price in 5 years in exchange for paying a premium over and above market rent. If prices crash in 5 years, the renter doesn't exercise the option, if prices go up, the renter can get a good deal. The advantage for the landlord is higher yields plus greater certainty about investment exit.

Interesting idea Theo...
Questions:
1) Any idea on a typical premium?
2) "Greater certainty on investment exit"? how is this so given that if prices crash the renter isn't going to exercise the option
3) Would the norm for the fixed price be the current market value?
4) If the landlord sells the property presumably the opiton dies - or does the option have to remain attached to the property?

 

[Theo]

Interesting idea ...
Questions:
1) Any idea on a typical premium?
2) "Greater certainty on investment exit"? how is this so given that if prices crash the renter isn't going to exercise the option

The premium will be whatever you can agree on. I don't know of any precedent here. It would be interesting to hear from someone if they have concluded such an agreement.

The greater certainty means that a prospective buyer already exists, there is a price agreed and so an investor can know what return he/she will likely get (and is happy with) from day 1 so the greed and emotion is gone out of it. If the deal goes ahead, it can be quick with minimum transaction fees.

If the deal doesn't go ahead, its likely the tenant will remain and the house/garden etc. is more likely to have been kept well by the tenant. The landlord/tenant may even re-negotiate a new option.

 

[darex]

Thanks for the info
2 further questions (since added to my original post)

3) Would the norm for the fixed price be the current market value?
4) If the landlord sells the property presumably the opiton dies - or does the option have to remain attached to the property?

Also from what you are saying this isn't common here so on a practical level it would probably be hard to find a landlord who would go along this route

 

[Theo]

Thanks for the info
2 further questions (since added to my original post)

3) Would the norm for the fixed price be the current market value?
4) If the landlord sells the property presumably the opiton dies - or does the option have to remain attached to the property?

Also from what you are saying this isn't common here so on a practical level it would probably be hard to find a landlord who would go along this route

In answer to your questions:

3) I would doubt that. The landlord is an investor (presumably) and will want a capital return over the 5 year period (or whatever period is agreed). Again, its down to bargaining.
4) I would imagine that no renter would sign a lease option contract that would give the landlord this right. The renter is, after all, paying for the right to have the option.

Yes, i don't believe this is a common practice here but asking is a good habit to get into. All they can say is no.

 

[walk2dewater]

What a silly thread. Darex, here's some free advice: property prices are coming down in a future near you. Despite the deafening roar on this little island, preserving and growing your wealth does not begin and end with property. Property right now is about the WORST invest you can make, on a pure risk/return basis, yes you read that correctly. There is a WORLD of investing out there. Get a cheap brokerage account, like www.internaxx.lu and start learning [Irish brokers are expensive and limited in scope]. You can make money under any circumstances, up or down or sideways markets in any asset-- you just have to have a bit of know-how.

But before you do anything make sure your debt in zero. The world of free money is ending as of right now, and cash, your own cash that is, not someone elses, is king.

 

[kane3000]

Hi WTTW,
A bit off-topic however I have noticed from other posts that you are interested in commodities,shares and other vehicles. May I ask how you started out learning about all that stuff. There seems to be so many options that it is difficult to know what to do - even with diversification.

Cheers

 

[walk2dewater]

Hi WTTW,
A bit off-topic however I have noticed from other posts that you are interested in commodities,shares and other vehicles. May I ask how you started out learning about all that stuff. There seems to be so many options that it is difficult to know what to do - even with diversification.

Cheers

I got a brokeage account when I was a student in Canada; have had one ever since. They give them out like smarties there. Best thing I've ever done/been given in a financial sense. At first I invested tiny amounts, made big mistakes and big gains with those little amounts. In other words I learned by doing with play money. There is absolutely no better way to concentrate your attention on something when your money at stake.

It’s amazing that just about anyone with any money at all in Canada has a brokerage account and actively invests in stocks, bonds etc etc. you name it. Here? Apart from a select few, whom I know represent a minority, virtually no one does this. So guess where all that investment money flows?

 

[anseo]

property prices are coming down in a future near you.

Can't agree more.

David McWilliams has some great articles on the ecomony:

[broken link removed]

The party will be all over soon. People will talk about Irish property and the Albanian pyramid scheme in the same breath.

 

[darex]

What a silly thread. Darex, here's some free advice: property prices are coming down in a future near you. Despite the deafening roar on this little island, preserving and growing your wealth does not begin and end with property. Property right now is about the WORST invest you can make, on a pure risk/return basis, yes you read that correctly. There is a WORLD of investing out there. Get a cheap brokerage account, like www.internaxx.lu and start learning [Irish brokers are expensive and limited in scope]. You can make money under any circumstances, up or down or sideways markets in any asset-- you just have to have a bit of know-how.

But before you do anything make sure your debt in zero. The world of free money is ending as of right now, and cash, your own cash that is, not someone elses, is king.

Good advice im sure w2dw - my debt is currently zero.

However had just about made up my mind not to buy when this came out this morning (I live in Dublin by the way):

The average price of a second-hand property in Ireland rose by 7.6% during the opening quarter of 2006, Sherry FitzGerald estate agents said today.

This follows growth of 17.3% during 2005.

The pace of inflation in the Dublin second hand market however was notably stronger at 11.2% for the first quarter, bringing the rate of increase to 30.5% for the twelve months to March 2006. This compared to a national average growth rate of 23.3% during 2005.

 

[bearishbull]

Good advice im sure w2dw - my debt is currently zero.

However had just about made up my mind not to buy when this came out this morning (I live in Dublin by the way):

The average price of a second-hand property in Ireland rose by 7.6% during the opening quarter of 2006, Sherry FitzGerald estate agents said today.

This follows growth of 17.3% during 2005.

The pace of inflation in the Dublin second hand market however was notably stronger at 11.2% for the first quarter, bringing the rate of increase to 30.5% for the twelve months to March 2006. This compared to a national average growth rate of 23.3% during 2005.

and you think this is sutainable in the increasing interest rate environment?

 

[darex]

and you think this is sutainable in the increasing interest rate environment?

Long term no of course not - but how long before interest rates start to take effect? - with the current upward momentum I would say min 1 yr possibly 2.

Given that the momentum is so powerful then it is going to take a lot to stop it - my opinion anyway

 

[beattie]

Long term no of course not - but how long before interest rates start to take effect? - with the current upward momentum I would say min 1 yr possibly 2.

Given that the momentum is so powerful then it is going to take a lot to stop it - my opinion anyway

I would tend to agree, it will take interest rates to hit 3.25-3.5% before sanity takes hold IMO, though I do notice that some investors might be bailing out before the ship hits the iceberg.

 

[ivuernis]

I would tend to agree, it will take interest rates to hit 3.25-3.5% before sanity takes hold IMO, though I do notice that some investors might be bailing out before the ship hits the iceberg.

We could have those rates by the end 2006 / early 2007 if the ECB continues to raise rates as expected which isn't too far away at all.

If ECB rate continues to raise every 3 months or so at 0.25% I wonder how many FTB's will be persauded to hold off on buying for the time being to see how things pan out in the next 12-18 months and what possible market consequences this might have?

 

[darex]

We could have those rates by the end 2006 / early 2007 if the ECB continues to raise rates as expected which isn't too far away at all.

If ECB rate continues to raise every 3 months or so at 0.25% I wonder how many FTB's will be persauded to hold off on buying for the time being to see how things pan out in the next 12-18 months and what possible market consequences this might have?

The concern as a FTB is that the market may rise another 10% at least before leveling out. Note leveling out not falling. While leveling out has to happen falling is not garaunteed - see the UK, some small falls but not enough to justify not having bought until very late on the price rise upslope.