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Old 12.09.2011, 08:40
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Does high inflation (as a result of SNB) mean a hike in interest rates.

Hi all,
Im hoping someone here will shed light on this in so much as one can.

Apparently prices are due to rise due to the SNB pegging of the CHF. Inflation. I get it. SNB prints more money. More money in circulation. Less products (as they are being bought by that money). Drives prices up. Very simplistic I know but I dont have much of an understanding of economics so I need everything explained like its a dummy guide.

How does this effect interest rates? Does this mean as a home owner we will experience a hike in mortgage repayments?

Thanks.
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  #2  
Old 12.09.2011, 09:05
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

Certainly not in the short term when they're battling against a strong franc. They will let inflation go. When the times comes to address inflation, then yes interest rates will go up. But nobody can put a time on when then might happen. Not any time soon.
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Old 12.09.2011, 09:29
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Hi all,
Im hoping someone here will shed light on this in so much as one can.

Apparently prices are due to rise due to the SNB pegging of the CHF. Inflation. I get it. SNB prints more money. More money in circulation. Less products (as they are being bought by that money). Drives prices up. Very simplistic I know but I dont have much of an understanding of economics so I need everything explained like its a dummy guide.

How does this effect interest rates? Does this mean as a home owner we will experience a hike in mortgage repayments?

Thanks.
normally rates would rise in response to anticipated inflation, but given the macroeconomic and political position, rates are likely to be low (in fact, real rates are likely to be negative) as safe haven flows continue.

the SNB unlimited defence of the peg should create something of an automatic stabiliser, but i think that this point would result in high inflation which would eventually lead the SNB to abandon the peg.

in the end, the peg will be dropped and rates will rise, but this could be a long long way down the line.

as a homeowner, i would say enjoy the current low rates and if you want to fix, you need to fix in the long end to benefit (minimum 10/15 years).
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Old 12.09.2011, 13:19
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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as a homeowner, i would say enjoy the current low rates and if you want to fix, you need to fix in the long end to benefit (minimum 10/15 years).
That's exactly what I'm doing.
All my mortgage in a 10 years fix at around 2.2%, compared to an average of 3.68% in the last 7 years.

We are in a very interesting historical moment, where the 10 years fixed interestes are much lower than the average 2 years fixed in the last 7 years, which is 2.62%
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Old 12.09.2011, 16:17
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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That's exactly what I'm doing.
All my mortgage in a 10 years fix at around 2.2%, compared to an average of 3.68% in the last 7 years.

We are in a very interesting historical moment, where the 10 years fixed interestes are much lower than the average 2 years fixed in the last 7 years, which is 2.62%
Agreed - might sound obvious, but you need to be pretty sure that either you remain here for 10 years or the mortgage is attractive enough to be bought by the next occupants when you move...
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Old 12.09.2011, 16:46
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Agreed - might sound obvious, but you need to be pretty sure that either you remain here for 10 years or the mortgage is attractive enough to be bought by the next occupants when you move...
or you can rent your property out.
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Old 12.09.2011, 16:54
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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or you can rent your property out.
Interesting point (maybe another thread) - we looked at renting out our current property when we move next year and it just didn't add up at all....mortgage costs and interest payments plus amortization were so close to each other that even a 95% occupancy over the next few years made it not worth doing. Be interested to know if it has made sense for anybody (although we aren't in the centre of a major city, so it may just be demand driven....but I'd assume that purchase price and rental price go pretty much hand in hand)
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Old 12.09.2011, 17:09
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Interesting point (maybe another thread) - we looked at renting out our current property when we move next year and it just didn't add up at all....mortgage costs and interest payments plus amortization were so close to each other that even a 95% occupancy over the next few years made it not worth doing. Be interested to know if it has made sense for anybody (although we aren't in the centre of a major city, so it may just be demand driven....but I'd assume that purchase price and rental price go pretty much hand in hand)
given the high rents and very low interest rates, this surprises me. if i rented my place out, the tenants would pay off my mortgage within about 15 years.

because of the illiquidity in the swiss property market, i would never buy a property that didn't give a good rental yield since i couldn't bank on selling it again.

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Old 12.09.2011, 17:24
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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given the rental costs and very low interest rates, this surprises me. if i rented my place out, the tenants would pay off my mortgage within about 15 years.

because of the illiquidity in the swiss property market, i would never buy a property that didn't give a good rental yield since i couldn't bank on selling it again.
Rental income here (for our place) is 0.32% per month of sales price so 3.8% gross return per annum, assuming 20% mortgage deposit is 4.6% return on the mortgage only element. Depending if you were happy on getting no return on your deposit.... 10 year mortgage rate today is 2.6%, so it would be a net 1.2% return, or 2% without the deposit. With tax and everything else being equal, it just didn't seem like a good return.

(There were actually other elements too which were more relevant to the decision).

How do the economics work for your 15 year pay off? Genuinely interested in how the % work
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Old 12.09.2011, 17:49
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Rental income here (for our place) is 0.32% per month of sales price so 3.8% gross return per annum, assuming 20% mortgage deposit is 4.6% return on the mortgage only element. Depending if you were happy on getting no return on your deposit.... 10 year mortgage rate today is 2.6%, so it would be a net 1.2% return, or 2% without the deposit. With tax and everything else being equal, it just didn't seem like a good return.

(There were actually other elements too which were more relevant to the decision).

How do the economics work for your 15 year pay off? Genuinely interested in how the % work
sent you a PM with details.

in summary annual gross return of 7.3%.

with mortgage leverage, that becomes an effective 36% gross annual return on capital invested.

after mortgage costs it's down to around 28%, but that still pays back the deposit in 4 years.

Last edited by Phil_MCR; 12.09.2011 at 20:29.
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Old 12.09.2011, 20:13
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Rental income here (for our place) is 0.32% per month of sales price so 3.8% gross return per annum, assuming 20% mortgage deposit is 4.6% return on the mortgage only element. Depending if you were happy on getting no return on your deposit.... 10 year mortgage rate today is 2.6%, so it would be a net 1.2% return, or 2% without the deposit. With tax and everything else being equal, it just didn't seem like a good return.

(There were actually other elements too which were more relevant to the decision).

How do the economics work for your 15 year pay off? Genuinely interested in how the % work
Sounds about right. Does make one wonder why anybody would rent out a property?
I suppose it is one way to avoid high taxes on any property value gain if sold instead?

Where I live I would guess the monthly return is better than 0.32% but not better than 0.35%
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Old 12.09.2011, 20:29
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Sounds about right. Does make one wonder why anybody would rent out a property?
I suppose it is one way to avoid high taxes on any property value gain if sold instead?

Where I live I would guess the monthly return is better than 0.32% but not better than 0.35%
near me, the gross yields were around 8% a year ago. mine is around 7%.

due to illiquidity in the swiss property market, i wouldn't buy a house that had less than a 5% net rental yield.

a while back, i PM'd a few people to see if they were interested in buying a place in the similar area for an investment, but there wasn't much interest at the time. sadly, almost all the housing stock has now been snapped up.
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Old 12.09.2011, 20:43
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Hi all,
Im hoping someone here will shed light on this in so much as one can.

Apparently prices are due to rise due to the SNB pegging of the CHF. Inflation. I get it. SNB prints more money. More money in circulation. Less products (as they are being bought by that money). Drives prices up. Very simplistic I know but I dont have much of an understanding of economics so I need everything explained like its a dummy guide.

How does this effect interest rates? Does this mean as a home owner we will experience a hike in mortgage repayments?.
Certainly no time soon. Maybe this can explain it more for you http://en.wikipedia.org/wiki/Central_bank

There shouldn't be much upwards movement for the next 5-10 years. Our bank was trying to get us to fix our mortgage then the Euro dropped. I don't see an increase in interest rates for at least 2 years and it will be at least 5 years before the rate is enough above the current fixed rate enough to make fixing now worthwhile. Don't listen to the sh*te client advisers at your bank tell you.

I didn't think rates could get any lower then my latest mortgage statement came through with 0.7% . Postfinance gives us a better return on our savings.
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Old 13.09.2011, 12:48
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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Certainly no time soon. Maybe this can explain it more for you http://en.wikipedia.org/wiki/Central_bank

There shouldn't be much upwards movement for the next 5-10 years. Our bank was trying to get us to fix our mortgage then the Euro dropped. I don't see an increase in interest rates for at least 2 years and it will be at least 5 years before the rate is enough above the current fixed rate enough to make fixing now worthwhile. Don't listen to the sh*te client advisers at your bank tell you.

I didn't think rates could get any lower then my latest mortgage statement came through with 0.7% . Postfinance gives us a better return on our savings.
I'd like to have the same optimistic view.
I have to make a decision in the next few days about my mortgage, and I'm going crazy with calculations and scenario simulations.

I agree the rates will stay low for a while, but how can we predict how will the market be in 5 years? The fixed 5-years interests rates are 1.47% now, same time 5 years ago were 3.17%.

If I would split my CHF 1M debt in two tranches, one in 5 years fixed at 1.45% and one in 10 years fixed at 2.22%, and the 5 years fixed rates would evolve like they did in the last 5 years, I would lose money no matter the proportion between the 2 tranches.

Similarly, putting a 25% on a 2-years fixed and seeing the rates increasing in the next 2 years from 0.92% to the past average of 2.62% would be too much, taking into account that the possible savings if the rates stay low are around CHF 5,000 - not worth the risk IMO, but that's of course a personal consideration.
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Old 13.09.2011, 13:30
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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I'd like to have the same optimistic view.
I have to make a decision in the next few days about my mortgage, and I'm going crazy with calculations and scenario simulations.

I agree the rates will stay low for a while, but how can we predict how will the market be in 5 years? The fixed 5-years interests rates are 1.47% now, same time 5 years ago were 3.17%.

If I would split my CHF 1M debt in two tranches, one in 5 years fixed at 1.45% and one in 10 years fixed at 2.22%, and the 5 years fixed rates would evolve like they did in the last 5 years, I would lose money no matter the proportion between the 2 tranches.

Similarly, putting a 25% on a 2-years fixed and seeing the rates increasing in the next 2 years from 0.92% to the past average of 2.62% would be too much, taking into account that the possible savings if the rates stay low are around CHF 5,000 - not worth the risk IMO, but that's of course a personal consideration.
why not have a 10 year fixed tranche and the rest in LIBOR. i don't see the point in fixing for 5 years.
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Old 13.09.2011, 14:07
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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why not have a 10 year fixed tranche and the rest in LIBOR. i don't see the point in fixing for 5 years.
It was an example, but a multifix 2-year/5-years/10-years would allow to take more advantage of today's low rates, while at the same time try to split the risk into different solutions.

What I'm looking at the moment is
50% 10-years fixed
25% 5-years fixed
25% 2-years fixed or LIBOR

Unfortunately short term fixed are only interesting when the rates are low. When rates increase, the short term fixed are growing much faster than long term fixed, and that's why having a 25% tranche on LIBOR or 2-years doesn't seems an acceptable risk.

This is all coming from my idea that the rates are so low, and this is so exceptional, that it can't last for much longer. Maximum 6 months. But I'm all but an expert and I might be very wrong. I still haven't decided if I'd like to take the risk with my money, or be the ostrich and bury my head in the sand with a 100% 10-years fixed.
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Old 13.09.2011, 14:11
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

The SNB will avoid raising interest rates because with the present scenario, I'd say higher interest would be more money coming from abroad which would mean a stronger franc.

They want Switzerland to be unattractive for incoming cash.
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Old 13.09.2011, 14:17
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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It was an example, but a multifix 2-year/5-years/10-years would allow to take more advantage of today's low rates, while at the same time try to split the risk into different solutions.

What I'm looking at the moment is
50% 10-years fixed
25% 5-years fixed
25% 2-years fixed or LIBOR

Unfortunately short term fixed are only interesting when the rates are low. When rates increase, the short term fixed are growing much faster than long term fixed, and that's why having a 25% tranche on LIBOR or 2-years doesn't seems an acceptable risk.

This is all coming from my idea that the rates are so low, and this is so exceptional, that it can't last for much longer. Maximum 6 months. But I'm all but an expert and I might be very wrong. I still haven't decided if I'd like to take the risk with my money, or be the ostrich and bury my head in the sand with a 100% 10-years fixed.
but what will you do after the 5 years? will you pay it off within 5 years? if not, then you'll end up resetting to a higher rate after the 5 years.
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Old 13.09.2011, 14:21
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Re: Does high inflation (as a result of SNB) mean a hike in interest rates.

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but what will you do after the 5 years? will you pay it off within 5 years? if not, then you'll end up resetting to a higher rate after the 5 years.
Exactly. This is why I'm strongly considering the 10-years fixed.

Or, and I'd like your opinion on this, I'll go for 50% fixed and 50% 3-months LIBOR until the situation starts changing.
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Old 13.09.2011, 14:46
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Exactly. This is why I'm strongly considering the 10-years fixed.

Or, and I'd like your opinion on this, I'll go for 50% fixed and 50% 3-months LIBOR until the situation starts changing.
they way i see it:

10 years fix. great rates - in fact, we may never get such good rates again. you fix, leave it, can sleep well at night and know you got a good rate (albeit not the best possible rate).

however, LIBOR is still 3x cheaper than the 10 year fixed right now.

i was going to go with 50% libor and 50% 10 year fix. but then my job started to look a bit uncertain, so to stay on the safe side, i went with 1/3 LIBOR 2/3 10 year fix.

but i made sure the LIBOR component was fully flexible so that if IRs did shoot up, i could simply just repay the LIBOR component and so i still have a way out if IRs spike up unexpectedly.
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