Q&A with CMMB Securities

Q. Could I apply for a home equity loan in order to pay off my credit card debt which stands at over $20,000?

Phillip, Arouca

A: That might not be a prudent thing to do given that the interest rate on credit card facilities is extremely high and so it is not a cost-efficient mechanism to be financing long-term expenditure. The interest rates on credit card facilities have been around 24% over the past five years even though all other interest rates have come down to historic lows over the past two years. It’s worth noting that the rates on mortgages or “home equity loans” have fallen in tandem with the market and they can be stretched over a much longer period of time thereby reducing the monthly repayments. However, to qualify for a home equity loan your house must be free and unencumbered, meaning that there must be no charges on it from your current mortgage if you have one. If your house is already mortgaged then it may not be possible to access this facility as your house is already held as collateral by your mortgage institution. Still, there are cases where some institutions have taken “second mortgages” over houses in advancing “home equity” loans. Talk to a qualified financial advisor to explore the possibilities open to you. On another note, one must be careful putting up one’s house as collateral to refinance unnecessary expenditure. Remember, if you are engaging in consumerism and using your house to refinance, you are exposing yourself and your family to the risk of the bank taking your house if you cannot pay. You do not want to find yourself out on the streets if for some reason you are unable to meet your payments. Therefore, you should use this option as a last resort.

Q. What is a long bond?

Tracy, Woodbrook

A: Generally, a long bond is simply one with a long maturity, i.e. its maturity date is a long time into the future usually over ten years. However, the term can also be used in a specific context. In the Treasury market (that is, the market for Government debt in any country) there is going to be debt with different maturities. You may have a range of maturities including 90 days, 180 days, 3 years, 5 years, 10 years, 20 years or even 30 years. The treasury issue with the longest maturity is sometimes referred to as the “long bond”. The interest rates on the “long bond” in any developed market is an important indicator of the long term expectations for interest rates and also signals the long run growth rate of the economy. The long bond should not be confused with the expression “going long a bond”. The latter has to do with taking positions on any bond, not necessarily a Treasury issue. When a trader says he is “long a bond” it simply means that he is betting that the price of the bond is going to increase as opposed to if he is “short the bond”, meaning that he is betting that the price of the bond would fall.

Q. What sort of interest rate should I look for so that my money is not eaten away by inflation?

Anjanie, Couva

A: There are certain investment instruments, the rates of return on which track the rate of inflation. So if you invest in these, the rate of return you earn would be inflation-adjusted or would exceed the rate of inflation. For example, if the rate of inflation is 2% and the return on your investment is 5% then the “real” rate of return is 3%. If the rate of inflation subsequently increases by 0.5% then you would want your return on that same instrument to also increase by 0.5% to 5.5% in order to earn the same ‘real’ rate of return of 3%. If the return on the instrument does not increase commensurately with the rate of inflation then the real rate of return falls to 2.5% from 3%. An example of an instrument, which stays fixed irrespective of the rate of inflation, is a fixed deposit. However, a money market account, which floats with market conditions, would tend to fluctuate with the level of inflation. So it’s not an absolute rate that you should be looking for to preserve the value of your wealth. Rather, you want an instrument whose return is sensitive to changes in inflation so that the real rate of return on your funds is maintained when inflation changes up or down.

Questions can be sent to PO Box 1830, Wrightson Road, Port-of-Spain. email : cmmbsecurities@mycmmb.com