Moshe Wilshinsky – Mortgages

If Rising Interest Rates Are of Interest to You…

I want to discuss a subject that is on the rise — rising interest rates.

Since the economic turmoil in 2008, many people look to Japan and its two decades of low interest rates and use that as an indication of where the US, and to some extent, world interest rates are headed. A contrary opinion which has been growing the past few years is that the fundamentals are already in place for inflation to take hold and it is just a matter of time.

A discussion of economics, inflationary pressures and their interrelationship with interest rates is beyond the scope of this article, but keep in mind that they are inherently connected. While interest rate markets are market driven, there are interest rates (usually short term) that are set by governmental bodies (usually central banks) that can drive markets in one direction (up) or another (down).

In order to understand the issues in context, think of it like this. From the point of view of the government or society, inflation is a symptom of a type of a medical condition. The interest rate adjustments administered by central banks are a type of medicine administered to a patient whose side effects have to be weighed. Long term rates can be affected as well but they are much more market driven.

A weak economy is one of the factors that will keep a central bank from raising rates as long as inflation is not out of control. Keep in mind that in the past few years, the central banks in the US and the EU have broken many of these norms. “Contrarians” (if they are still the minority) – will refer to the “stagflation”, that the US and other world economies suffered in the 70s. In those years, you had weak economies, runaway inflation and yes, very high interest rates. The Bank of Israel’s Governor, Stanley Fischer, was quoted (Globes, March 13, 2013), saying that he believes world interest rates will start to rise by 2015. It is reasonable to assume that interest rates in Israel will follow world trends.

How you relate to rising interest rates depends on whether you are a supplier or consumer of money. In other words, if you are living on fixed income from investments, you are supplying money to the market and living off interest rates. If this is so, then rising interest rates are generally good news. (You just have to be concerned that the rates rise faster than inflation, i.e. real interest rates.)

However, if you are primarily a consumer of money, e.g., you have a mortgage and are not living off your investments, then this may be reason for concern. In most countries mortgages are the largest and longest term debt a consumer has. In Israel, rising interest rates are particularly relevant to the mortgage market. This is because a significant number of mortgages are adjustable in one form or another — some to inflation (readers of my previous articles know my reservations about inflation-linked mortgages) others to one index or another. All in all, rising interest rates will affect a lot of people in Israel. Therefore, news reports about Stanley Fischer’s comments gain heightened interest and give everyone a reason to re-examine a current mortgage.

Mortgages, like any other financial matter, have to fit your needs. These needs can change with life events, economic environments, etc. Someone who has a nominal fixed rate mortgage probably does not need to think twice about this (assuming their currency exposure is neutral) but everyone else should reassess their mortgage. Current qualification requirements in Israel may limit some borrower’s options. It is worth dealing with this sooner than later because in the future, you may realize your monthly payment increases are more than you can to swallow.

From the point of view of an individual investor, the higher the inflation, the higher the return (e.g. interest rate) you require to retain value, let alone make money.

 

Moshe Wilshinsky is the CEO of Moville Mortgage & Finance LTD. Contact information: In Israel: 073-796-2226 and press the special 711 Bizness Magazine extension; U.S.: 201-377-3418; UK: 208-596-4501. Website at www.movillefinance.com.

 

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