Monday, November 12, 2007

Cost of Funds Falling

My mortgages are all at floating rates. The most recent fixings have been at rates of 4.5%, 4.3% and 3.9%. In mid year most of the fixings were at or around the 5% mark. The 3.9% is very cheap money, being lower than the net yield on properties and, after adjusting for tax, is probably not far away from the genuine rate of inflation - meaning that the real cost of funds is getting close to zero.

There really is very little incentive to pay of debt early and, so long as I remain confident that asset values will rise in at least nominal terms over the medium term, considerable incentive to use leverage when investing.

Of course, the sharp declines in a number of stock markets today is as good a warning against the perils of over gearing as any.


Raphael said...

On that topic, I just noticed that BOC are offering 40 year mortgages now! I'm still waiting for interest only mortgages to come out in HK (a leverage addicts best friend), but no luck just yet :)

What with all this liquidity, and the changing habits of purchasers (I get much less shocked gasps these days when I ask banks for a 95% mortgage), I think a property bubble is definitely in the cards.

traineeinvestor said...

The competition amongst lenders continues to drive lending rates down and push the banks to offer more favourabloe terms generally.

I like interest only mortgages. You can get them in HK but, like fixed rate mortgages, they are on unfavourable terms.

The mortgage market in Hong Kong is still a model of conservatisim compared to other markets like:

1. Japan in the 1980s when banks offere "two generation" mortgages;

2. the United States which offered liars loans etc so readily (and then wonders why there is a sub-prime crisis);

3. products which offer loan to value ratios of 100% or more.

Hong Kong's issue is a weight of liquidity. I do not view the trend of increasingly more favourable terms as indicative of loose lending standards.

Of course, the sheer weight of liquidity has the potential to create a bubble - although I do not think we have reached that stage yet.

Raphael said...

Hi Trainee,

Which banks / organizations are offering fixed rate / interest only loans?

I agree, competitiveness is not creating a bubble, I was thinking more in terms of lending standards. Maybe it is just me, but they seem to be going from ultra-conservative to conservative :)

Last year people in banks would actually gasp when I said 95%! Now they seem to be less shocked.