Should You Increase Your Monthly Mortgage Payment Increase with Interest Rate Rise?

Well most of you with mortgage might already received the letter from your respective banks telling you that Bank Negara increases Overnight Policy Rate and they feel bad but still needs to charge you higher interest rates because the boss bank says so… While we keep Fixed Deposit rates fixed and revise maybe after CNY holidays.

Obviously, they didn’t ask you increase your monthly payments immediately on this month’s mortgage payment but you can pay more if you like. But the fact is, you will be bearing a higher amount of loan than what it was before the rate hike.

Now the question is, should you increase your monthly mortgage payment in tandem with interest rate rise?

Historically?

First, we look at some historical data.

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If you look at Consumer Price Index since 30 years ago, it rose 218% which meant that your plate of Nasi Kandar rose from RM5.00 to RM10.90 (that sounds more like it)…

But if you look at housing price index data, it rose higher than consumer price index over the same period to 272%. Note that this is overall in Malaysia. Major cities register higher inflation on housing.

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Over 30 years, assets such as real estate really fly high and in top cities such as Kuala Lumpur, Johor or Penang, we aren’t surprised to see a 400% rise.

Payment Schedule

Second, we take a look at housing loan payment schedule.

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The table above shows the total payments with different interest rates under a 30 year tenure for a RM500,000 loan.

Assuming that we see a 3.0% rise in interest rates over the next few years which we believe it’s possible. This brings most mortgages to roughly 7.6% interest per annul (one of the highest recorded so far in 2008). With that data, we came up with the table above comparing how much more you would have to fork out in the end.

You can see that over the course of 30 years assuming a permanent 3% rise in interest rates, at the end of life we are only looking at 37.73% rise in total payments. Comparing this value with the change in real estates prices, it far exceeds the inflationary boom for houses in Malaysia.

But one might felt that paying another 135 or 10+ years (possible with re-financing) is a complete burden. But it totally logical because long term payment weighs heavily for one with declining number of years to their life. The feel being debt free definitely feels good no matter what people tell you and we have no offense even if you plan to do so.

But in short, the bigger picture is that money not spent to pay up loan quickly could be used to obtained other financial assets like shares or merely sitting on fixed deposits because housing price change grows slow for the first 10 years but accelerates over the next 20.

Our advice is, don’t be too quick in repaying your mortgage with the rising rates. Take a good look at your wealth and plan a conservative approach in dealing with higher interest rates. Holding cash is good for rising rates and long term assets should be paid slowly even with the rise.


Obviously we made a few assumptions for this case:-

  1. Interest rates can spike to god knows where.
  2. Inflationary prices for CPI and HPI is based on historical. Nobody knows what the future is.
  3. Data comes from a very generalized view of the whole country.
  4. If housing crash would to happen, god knows how many years it would take to recover.
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Why Did we Call a Buy on MIKROMB Yesterday?

As retail investors, one thing that is common to us is where to buy or to hold when a stock price declines rapidly. Since we recommend a falling knife catching trade yesterday (didn’t turn out good due to decline in earnings), I would highlight the criteria of a ‘safe trade’ catching a falling knife.

Intra-day Catching

First, let’s look at intra-day movements where the stock price had been subjected to intense selling pressure or merely consolidating at previous closing price.

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Usually when one sees illustration A, it might seem like the sign is clear where there are plenty of buying quantity and buyers are coming up to support the price.

This market forces are almost the opposite of what the naked eye sees. To an untrained eye, illustration A is a buy while B is a sell. But buyers and sellers queuing are never sincere with their orders. Orders are subjected to change and in modern times, it gets worst with computerised algorithm making these queues.

But always remember that the volume rule of thumb is still in play.

Low volume price rise = Temporary price rise

Condition 1

If the stock would to go up without much volume in play, the response might be lackluster towards the price increase. Sellers might not queue their stock but immediately they might realize that price had gone up and the stock they are holding to (probably stuck for a long time) needs to be unloaded.

Condition 2

High volume drop = Permanent price drop

The availability volume on the buy side is key for an institutional investor. A person who wants to unload big amount of share looks upon volume to unload. Illustration A fits the criteria.

In fact if you look at illustration B, one couldn’t unload much under these circumstances unless fraudulent cases hit the company so bad that everyone is planning to leave the shareholding immediately.

This is why initiating a buy on illustration B with thin volumes could benefit you more than buying with mostly where all the buyers are in illustration A. A low volume drop ensures that a stock could rebound quick similarly to sell, buyers would begin to realize it hits their target price.

Another bonus rule of thumb to remember always would be…

Think like an Institutional Dealer

These guys like to do block trades as it is easier to compute on the back end. As institution holding large percentage of a company it is hard to find the same party on the buying end to take up your stock. When opportunity comes, it is now or never. That is why a stock may lag years but could move in a blink of an eye.


So Why Did we Call a Buy on MIKROMB Yesterday?

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  1. Did you realize that with the OBV indicator, the rise previously was much higher than before? When OBV rises and forms a higher high, it is a sign of accumulation. We know that people are accumulating this stock prior to the release of results expecting good earnings report.
  2. If your accumulate the days since 1st November, you will find out similar data where accumulated net volume was up 11 million shares.2.jpg
  3. Probably the most important thing and you should never catch a falling knife unless you stock fits this criteria. Based on research, we know that MIKROMB is poised to continue its growth that it is showing so far.

    If you buy at the wrong point this time around but knowing that the stock still has plenty of room to grow, the decline would open up opportunities to buy lower. That is by far the best thing that could happen.

    Buying stocks with good fundamental still ensures that you win the long term game while suggestions in catching the falling knife provides an edge by possibility accumulating at low prices.

Brent Technical Points to a Bigger Run

As much as I love to see oil going down from its current level, the technical analysis generated from the daily chart isn’t pointing it downwards. This meant more pain at the pumps in the future for us which paying more than the highest we’ve ever paid price of RM 2.70. The subsidized price was RM 2.70 back then but Brent was trading around $125 per barrel back then.

I guess merely a $65 per barrel oil would already see us paying RM2.70 challenging the historical high for all consumers in Malaysia. It is worrying the fact that consumer price index would rise at such a rapid rate when crude prices rise significantly. A backup plan to cushion a rapid rise in oil price is not yet in place which might end up creating a major shock later.

Moreover, oil is a commodity and commodity prices would rally within a huge cycle as production of the physical commodity tends to lag for a bit before it corrects itself meeting the right demand. Demand spikes signaled through reported GDP growth rates by major economies like China, US or the European Union would play a major role pushing oil prices higher this year.

The phenomenon of oil rising past $80 a barrel might have a low probability but the probability of oil dropping to $25 wasn’t there as well just 3 years ago!

Technical Analysis

Going back to technical analysis for Brent Crude, the Brent price is currently consolidating along $55 and somewhat formed a clear resistance at $57. We think that this is forming an ascending triangle where it soon might break the resistance of $57 and possible rallying to $60 before it takes a break again.

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Coupling that with a low MACD nearing the upper midpoint of zero, it proves that it still has room to go higher towards the positive side. The consolidating Moving Averages are currently holding the prices tight at $56 creating a support and with proper strength exerted, it would climb higher soon.

Fundamental Analysis

Fundamentally, the market is in a bullish environment this year and the feel-good factor is there to stay. Grow is likely to come back when major economies like US starts pushing growth plans where this is also the reason why oil spiked earlier after Donald Trump came into office.

The global feel-good factor on the economy hasn’t been factored in yet since China is still registering lower GDP growth rates. But as soon as growth rates stabilizes for several quarters, we should see commodity markets start picking up for a second rally.

Conclusion

We can’t do much really unless you can long oil futures and I think derivatives such as warrants issued by investment banks could include Brent as an underlying for us to trade or hedge in the future.

In the meantime, stocks like SapuraKencana seems to be the primary response in KLCI when oil prices move. This meant that the only way for us to benefit from an oil price rise is buying SKPETRO. But this is fairly in accurate since SKPETRO isn’t an upstream oil and gas company. It relies on the spending done by major oil companies like Petronas to derive its revenue and earnings.

I believe that the risk of oil price going up is more dangerous than ever judging from the current state of the Malaysian economy…