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  • Negative interest rates

    Real interest rates can be negative if the interest rate is lower than inflation.

    In Laymans terms this would mean that one would borrow money at say 2.5% (like Australia) buy pretty much anything such as bricks, manure or M&Ms, wait a few months for inflation to increase the price of the asset and then sell it, pay off the interest and still make money!

    With inflation currently at 2.6% this is technically possible for the RBA to do (no one can get a loan for that though)

    what a strange economical world we live in!

    Basically any non depreciating asset is a better investment than cash in the bank at the moment (on average) No wonder we live in a society that doesnt save!

  • #2
    Originally posted by gordonleslie View Post
    Real interest rates can be negative if the interest rate is lower than inflation.

    In Laymans terms this would mean that one would borrow money at say 2.5% (like Australia) buy pretty much anything such as bricks, manure or M&Ms, wait a few months for inflation to increase the price of the asset and then sell it, pay off the interest and still make money!

    With inflation currently at 2.6% this is technically possible for the RBA to do (no one can get a loan for that though)

    what a strange economical world we live in!

    Basically any non depreciating asset is a better investment than cash in the bank at the moment (on average) No wonder we live in a society that doesnt save!

    Kind of like Germany around both world wars and many other examples where there was crazy inflation... like Zimbabwe and Argentina?

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    • #3
      Isn't that the point of interest only loans... expecting house prices to rise more than the interest rate etc.

      Comment


      • #4
        Originally posted by black500r View Post
        Isn't that the point of interest only loans... expecting house prices to rise more than the interest rate etc.
        yep but you can only do this for 5 years then you have to refinance apparently?


        Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?


        RR
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        • #5
          Originally posted by RRossi View Post
          yep but you can only do this for 5 years then you have to refinance apparently?


          Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?


          RR
          I'm a fool with money so I wouldn't know. Mine is tucked away in an iSaver feeding me 4% rather than earning me a ton more through investing etc.

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          • #6
            Originally posted by RRossi View Post
            yep but you can only do this for 5 years then you have to refinance apparently?
            Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?
            RR
            It's better to reduce your primary residence mortgage first (if you have one) before an investment property mortgage for taxation purposes.

            You can get IO loans > 5 years.

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            • #7
              Originally posted by rgvlee View Post
              It's better to reduce your primary residence mortgage first (if you have one) before an investment property mortgage for taxation purposes.

              You can get IO loans > 5 years.


              yeah that's what where doing still would rather pay both off and own them lock stock


              RR
              http://www.cleanride.com.au - https://www.facebook.com/cleanridedetailingstudio/ - https://twitter.com/CleanRideAD - https://www.instagram.com/clean_ride_aus/

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              • #8
                Originally posted by RRossi View Post
                yeah that's what where doing still would rather pay both off and own them lock stock


                RR
                The interest you pay on your primary residence isn't a tax deduction, the interest on your investment property is. So you pay off the primary residence first and then our investment property, and end up in a better position than you would have if you'd paid them both off similtaneously.

                As I recall an interest only loan is attractive for investment properties as it's easy to identify the interest paid to the ATO as well as allowing you to retain the full principal for maximum tax offest advantages on negatively geared property.
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                • #9
                  Originally posted by black500r View Post
                  Isn't that the point of interest only loans... expecting house prices to rise more than the interest rate etc.
                  Someone correct me if i am wrong but i dont think house prices are used to calculate inflation? Really people should be considering rental income plus asset appreciation to cover interest costs.

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                  • #10
                    This has an effect on whether or not you will be able to import.

                    If you run negative interest rates, people outside your economy will not want to hold your money - thus they will not want to accept it for international trade. Also, if they currently hold large quantities of it, they will dump it back into your economy, increasing the local money supply, and therefore, inflation in terms of prices of local goods/services.

                    This is why the US fed is no longer releasing monetary supply increase figures (as they could be used to infer the inflation rate via supply/demand of money) and doing their damnedest to hide the real rate of inflation (by writing off inconvenient increases as outliers and re-defining the rules for calculating it).


                    It's a recipe for hyperinflation.


                    Oh and the 2.5% reserve rate (is that what it is here now?) is only for banks. You, the little guy get fucked
                    Last edited by thro; 07-02-2014, 03:43 PM.
                    “Crashing is shit for you, shit for the bike, shit for the mechanics and shit for the set-up,” Checa told me a while back. “It’s a signal that you are heading in the wrong direction. You want to win but crashing is the opposite. It’s like being in France when you want to go to England and when you crash you go to Spain. That way you’ll never get to England!” -- Carlos Checa

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                    • #11
                      Originally posted by black500r View Post
                      I'm a fool with money so I wouldn't know. Mine is tucked away in an iSaver feeding me 4% rather than earning me a ton more through investing etc.
                      You do realise that, in real terms, that iSaver earning you 4% is, in fact, earning you nothing, or maybe even losing money, depending on your income tax bracket...

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                      • #12
                        Originally posted by RRossi View Post
                        yep but you can only do this for 5 years then you have to refinance apparently?


                        Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?


                        RR
                        Mine is an IO (line of credit) and is indefinite I believe...

                        Up to a certain value the interest rate is normal, over that it's like CC interest rates...

                        Have it set up on internet banking so I can put money in as I feel and reduce the principal...

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                        • #13
                          Originally posted by RRossi View Post
                          yep but you can only do this for 5 years then you have to refinance apparently?


                          Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?


                          RR
                          I have a mortgage on an investment property which is 25 years split fixed/variable. Length of the fixed interest period is determined only by the bank's ability to sell the annuity in the market at the time of financing.

                          My calculation for IO loans was just being able to put capital into higher performing investments and superannuation. There was (for me – at the time – this is NOT investment advice) tax advantages in leaving the money in super then withdrawing as a lump sum and paying off the principal on my primary residence at retirement (which given real wage growth, super fund performance and advances in medical technology, I will be able to afford in about the year 2457...).

                          - - - Updated - - -

                          Originally posted by RRossi View Post
                          yep but you can only do this for 5 years then you have to refinance apparently?


                          Im doing this at them moment and it goes against my better judgement, surly you want to pay of some of the principle no?


                          RR
                          I have a mortgage on an investment property which is 25 years split fixed/variable. Length of the fixed interest period is determined only by the bank's ability to sell the annuity in the market at the time of financing.

                          My calculation for IO loans was just being able to put capital into higher performing investments and superannuation. There was (for me – at the time – this is NOT investment advice) tax advantages in leaving the money in super then withdrawing as a lump sum and paying off the principal on my primary residence at retirement (which given real wage growth, super fund performance and advances in medical technology, I will be able to afford in about the year 2457...).

                          Comment


                          • #14
                            Originally posted by BenG View Post
                            You do realise that, in real terms, that iSaver earning you 4% is, in fact, earning you nothing, or maybe even losing money, depending on your income tax bracket...
                            Read: "I'm a fool" ^_-

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                            • #15
                              Originally posted by black500r View Post
                              Read: "I'm a fool" ^_-
                              To be fair he is only a fool with hindsight. If/when house prices drop due to demographics he will look like a genius. And when the money printing starts to keep the economy on track and inflation gets out of control he will look the fool again.

                              Show me a guy who can predict the economy and i will show you a fool!

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