Mark on money

I am in the process of buying my first property and require assistance with the type of loan to get. Firstly, I have one year till the final signing of the contract and, given that interest rates are always increasing due to an increase in the Central Bank Intervention Rate, should I invest some of my savings over the next year in interest bearing instruments, such as MGS? Secondly, I was going to take part of the loan at a fixed interest rate of 4.7% for five years with the balance as a variable loan, currently at 5.5%. Do you think this is a good idea and are interest rates in Malta likely to go down below 4.7% in the next five years?

Taking your first point, security of your capital is of utmost importance over the next year as I presume you will be using your savings towards the capital expense of buying your home. I would therefore generally recommend you keep the money you have in cash.

You may wish to keep part of it on a six- to 12-month deposit if the interest rate offered is sufficiently higher than the variable rate offered by your bank.

While Government bonds will provide you with slightly better interest, you must take into account the costs of buying and selling. The stockbroking fee may not justify the extra bit of interest you will get over the next 12 months.

Your second point on the type of loan to take - fixed or variable - is a bit more tricky as one cannot possibly accurately predict interest rate movements in the next five years.

The first thing you must bear in mind is that we are likely to adopt the euro next January, so you need to be considering the effect of euro interest rates as we will not have the Maltese lira as our currency.

Euro interest rates have been rising over the past year and, in my opinion, they will continue to do so this year. If this is the case, then you should opt for a fixed rate loan. What may happen in two to five years' time is much more difficult to predict.

The good thing about a fixed rate loan is of course that you can budget exactly for the monthly payments regardless of what happens to the bank lending rate. This is not the case with a variable rate as you could find your monthly payments fluctuate significantly. This is the risk you take with a variable loan.

In summary, splitting the loan - part fixed and part variable - is a good idea. The rate of 4.7% is fair and allows you to budget on half the cost of the loan.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com.

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