# Is it time to lock in a fixed interest rate?



## pj2105 (30 March 2009)

*** To the moderators, you should have a forum just on property, it is a form of stock and is a legitimate financial asset building strategy.


Regarding home loans, do you think it is time to lock in a fixed interest rates?

There maybe another rate reduction in April, but even if there is, there is no guarantee that the banks will pass it on.  They have said that they probably won't.

I am expecting another four or five months of no cash rate movement before they start to rise again shortly after that.

With all the cash that has been splashed about in such a short period of time around the world, it normally takes 12 months before these type of fiscal stimulus hits the numbers of the economy, so by the end of the year we will start to see it and then in 2010, I'd think they should go up.

Does anybody have a contrary idea?


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## nomore4s (30 March 2009)

As i don't have a home loan atm, what is the longest fixed term the banks are offering at a reasonably low rate atm?


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## kincella (30 March 2009)

PJ...there are two threads on property thats been going on here for years...very informative...there is also a related web site...aussiepropertyforums.com.....its new..
regarding rates...the banks have been slashing their deposit rates....down to 1.5% prior to the expected cut next week...and so they can pass on the cuts...I am hoping for a 4% rate or lower then I will lock in....3% would be even better....
and for all the talk and conferences worlwide....I just dont see anything actually happening to stop the crisis....its all talk...on radio today heard the PM say there is another g20 meeting later in the year.,,,,so are they praying the thing fixes itself...in the meantime tell us to wait for a g something meeting....just buying time imo
lock in the rates at any time that suits you....and I dont see rates rising again this year.....5% now is better than the 10% last year...
cheers


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## pj2105 (30 March 2009)

nomore4s said:


> As i don't have a home loan atm, what is the longest fixed term the banks are offering at a reasonably low rate atm?




Usually the banks tend to want to give you 3 years, but you can easily get 5 years if you ask for it.  But when I spoke to the bank manager they said there is no ceiling on years but they would feel uncomfortable if they get any more.
I'd like about 7 years, or maybe 10.

I don't know the fixed rate offhand, but I would say they would be anything up to 1% more than the variable rate.  So if the variable rate is around 5%, the fixed rate would be upto 6%.

That would look very good once rates return to the 9% range.


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## kincella (30 March 2009)

cba 10 or 15 year rate is now 6.99....only 5 years at the low rates max....the longer you fix the higher it goes....the banks do not expect the low rates to stay that way for long....
and if you only intend to hold the place for 5 years and not move...do not take out a 10 year rate....or if you do expect big break fees...
apparently you can take the loans with you under some circumstances

http://www.commbank.com.au/personal/apply-online/download-printed-forms/home-loan-update-002842.pdf
:sheep:


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## son of baglimit (30 March 2009)

pretty sure i read some fixed rates rose last week - you could assume the anticipated rate drop next month will just about see the end of it.

as far as what to do next - its simple maths - how long is it going to take to pay off vs how long will rates stay this low.

fwiw - after next months drop, fix for as long as you can, cos when they bounce back, its gonna get ugly.


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## Julia (30 March 2009)

kincella said:


> regarding rates...the banks have been slashing their deposit rates....down to 1.5% prior to the expected cut next week..



Where are you getting 1.5% from?????
That must be on basic ordinary account, not term deposit.  Suncorp are still offering 6% for three years.


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## MRC & Co (30 March 2009)

Yeh, I have a contrary idea.  

I wouldn't lock in a fixed home loan rate for now.

Rates will fall further this year and banks will pass some of that on IMO.


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## Rainmaker2000 (30 March 2009)

I would not lock in a rate at all yet........

The key for me is unemployment........if it rises a few things will happen

Home prices will not be strong.........and demand for homeloans will suffer also

The unique thing about this interest rate cycle is how the banks are not lowering rates in line with RBA...........yet............

As time goes by, the excess market returns of the banks will bring margins back down.......

It used to be as simple as waiting for the RBA............bu now its as complex as waiting for competition in the market place.........it may take years in light of the collapse of the non-banks and smaller players....

Either way, its going to be a good time (for those with employment..hehe)


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## kincella (31 March 2009)

Julia....it seems disbelief has set in for you....and you may be wrongly assuming I am rather naive....well I was talking about term deposit rates, and yes 1.5% is correct...
here is a comparison list....note how many have a 1.5% rate

psst ..wonder why you do not use the google search bar (or any other search tool)  to raise any questions and obtain the information direct for your self...
:sheep:
http://www.canstar.com.au/interest-rate-comparison/compare-100k-term-deposit-rates.html


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## nomore4s (31 March 2009)

kincella said:


> Julia....it seems disbelief has set in for you....and you may be wrongly assuming I am rather naive....well I was talking about term deposit rates, and yes 1.5% is correct...
> here is a comparison list....note how many have a 1.5% rate
> 
> psst ..wonder why you do not use the google search bar (or any other search tool)  to raise any questions and obtain the information direct for your self...
> ...




lol, I like how you always seem to pick the bits of info that support your arguement but leave out everything else. All Julia was stating was there are better rates than that still available but you make it sound like you can only get 1.5% now.

Note how many have rates between 3%-4.5%, lol


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## Prospector (31 March 2009)

I have been a house owner of sorts for over 30 years now; and just two years ago I took out my first fixed loan while all the others have been variable.  I had the loans when interest rates soared into the high teens.  Most of these have been for investment properties so they are tax deductible.  Even though the interest rate for the current (and only) fixed rate loan is just over 7%; I am required to pay a $45,000 exit fee if I wish to terminate, refinance etc etc

I can understand a fixed rate loan if it was your home, and you planned to stay for five years, in which case the exit fee is less important.  But having experienced both now, I would never fix a loan again!  

I guess with interest rates at historic lows fixing might be appropriate but just find out about those exit fees before you sign!



kincella said:


> psst ..wonder why you do not use the google search bar (or any other search tool)  to raise any questions and obtain the information direct for your self...
> :sheep:
> http://www.canstar.com.au/interest-rate-comparison/compare-100k-term-deposit-rates.html




Why would Julia need to google when she knows what Suncorp's rates are? 
I just checked my particular account with NAB and even a transaction account is 3% with immediate access.


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## Julia (31 March 2009)

nomore4s said:


> lol, I like how you always seem to pick the bits of info that support your arguement but leave out everything else. All Julia was stating was there are better rates than that still available but you make it sound like you can only get 1.5% now.
> 
> Note how many have rates between 3%-4.5%, lol



Exactly.

Kincella, of course I access the rates for myself.  I just don't much like the way you create the wrong impression by quoting rates selectively.


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## glads262 (31 March 2009)

If you lock in a 5 year fixed rate at 6%, and in two years you want to break it, you will only pay break costs if the 5 year fixed rate when you break is lower than 6%. So if rates go up, you will not pay break costs to get out of the contract because the bank won't be losing money so hence will pass on no cost to you.

The reason so many people are experiencing break costs now is that they are fixed on 7-8%, and are trying to break when fixed rates are around 5-6%.

So do not worry about break costs as rates are rising, only if they go lower.

Also, banks base fixed rates on the money market - which is COMPLETELY different to the RBA rate. Just because variable rates go down, doesn't mean fixed rates will. A 5 year fixed rate, for example, is based on the MONEY MARKETS view of interest rates over the next 5 years. Not the banks. The banks may build in their own margin, etc etc but because of competition, their rates rarely differ by more than .1%.

My view, if you have a home you are wanting to hang on to for more than the next 12 months, I would be fixing in at 5 years. This is because I believe that in 12 months time, fixed rates and variable rates will be much higher than where they are today.


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## Judd (31 March 2009)

The different approaches in this thread is fascinating, especially where a property is for investment proposes as opposed to owner occupied.

Our approach was to calculate the monthly payment required to pay off our home loan in ten years and to get as close as that as we could without having to live off baked beans.  In the end, it was around 65% of my salary.

Our reasoning was that if rates went up, we would not have to outlay anymore from our budget and if the rates went down, the loan was being paid off at a quicker rate.  Also, as pay rises came through, as they did in those days , then the mortgage was consuming a lesser proportion of our income.

Things became a little tight as we had children but we were able to discharge the loan in just under 12 years.

Probably be a lot harder to adopt that approach in the current environment.

This fella has an intriguing slant on fixed versus variable.

http://www.peachhomeloans.com.au/to-fix-or-not-to-fix.htm

He is also the CEO of Lateral Economics.

Trivia

Oddly enough there is a Dr David Gruen, Executive Director, Macroeconomic Group, Australian Treasury.  Probably he and Nicholas are related.


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## Gunlom (31 March 2009)

As the owner of several IP's, I took advantage of a offer WBC had back in January of 4.9% for 3 years, and locked in all my investment properties. 

This is a great offer, and I figured that even though interest rates where coming down, this is a great rate regardless. And it means to me that across my properties I'm cash flow positive for all outgoings. As I have no intention of selling in the near term, this locks in 3 years of stability, for me. Which in 2012, I can re-assess what to do.

Now I just have to wait for Bank-West to get there act in gear, and offer some descent fix term rates, for my PPOR.

As a long term property investor now is a great time to assess if fix rates are a good option for you.


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## Sir Osisofliver (31 March 2009)

Prospector said:


> I have been a house owner of sorts for over 30 years now; and just two years ago I took out my first fixed loan while all the others have been variable.  I had the loans when interest rates soared into the high teens.  Most of these have been for investment properties so they are tax deductible.  Even though the interest rate for the current (and only) fixed rate loan is just over 7%; I am required to pay a $45,000 exit fee if I wish to terminate, refinance etc etc
> 
> I can understand a fixed rate loan if it was your home, and you planned to stay for five years, in which case the exit fee is less important.  But having experienced both now, I would never fix a loan again!
> 
> I guess with interest rates at historic lows fixing might be appropriate but just find out about those exit fees before you sign!




I find that a really interesting comment Prospector. I view things from the other side of the fence. Timing is a concept that applies to loans and loan management just as it does to shares.

For me loan management is part of my risk management strategy. In August of '07 I went to my lender and negotiated a new line of credit facility (when banks were giving away lending capacity and which I would not be able to get now), and will be looking at fixing about 80 of the used portion of that capacity within the next few months for as long a period as possible. I know what sort of optimisation is appropriate so I'm unlikely to break that loan unless I win multi squillions on Lotto - in which case I won't care about the break fee.

Cheers
Sir O


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## Prospector (31 March 2009)

Sir O, no doubt the rule books and statistics will be re-written with the current historical low rates of interest, but over a period of time, variable interest rates are better than fixed interest rates.  Now don't ask me to quote my source but I just know I have read the figures somewhere! 

Ah, here is one from a quick google:

http://www.quickdirect.com.au/Content/To-fix-or-not.aspx
_In this article, we use Reserve Bank of Australia (RBA) data to go back through time and compare the cost of fixed and variable mortgages. We conclude that:

* 83% of the time borrowers would have been better off in basic variable rate products than 3 year fixed rate products._


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## Sir Osisofliver (31 March 2009)

Prospector said:


> Sir O, no doubt the rule books and statistics will be re-written with the current historical low rates of interest, but over a period of time, variable interest rates are better than fixed interest rates.  Now don't ask me to quote my source but I just know I have read the figures somewhere!





um what period of time are we talking?  Sounds like the argument between brokers and RE agents about which asset class is better. Moving the baseline comparison always does interesting things to statistics 

Of course using timing in relation to loan management has risks, just like using timing in the share market has risks. Mainly that if you mis-time, you'll be locked into a higher rate of interest than you would pay with a variable rate. So yes, if you mis-time your fixing period you'd have been better off leaving it variable. But if you time it right, you'd be better off fixing your rate (Over a certain period of time).  I'm attempting to lock in a rate that I don't expect to see again for a long long time. Of course locking it also means I know with certainty that I can positively gear the assets  - something I cannot do with certainty on a variable rate. To me that has value.

Cheers 
Sir O


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## nunthewiser (31 March 2009)

Sir Osisofliver said:


> so I'm unlikely to break that loan unless I win multi squillions on Lotto - in which case I won't care about the break fee.
> 
> Cheers
> Sir O





Gday sir O . does the break fee actually apply if the loan is payed out in full ?


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## kincella (31 March 2009)

where did I state you could only get 1.5%
this was an extract from the article...its not my words....
and I did post others were offering 7% etc...dont have the time to go back and copy every post on this one article

the article quite clearly states cba and nab slashing rates
I then posted the cannex comparison chart which again shows a variety of different rates.......but the article was about the big  4
.......sorry but I dont read it as 1.5 being the only rate available in all my posts on this article............
being selective....???maybe .. but again, only relating to this article....not across the board rates

copy of the extract again..................................

THE MAJOR banks are aggressively repricing their deposit books ahead of next week's expected rate cut by the Reserve Bank.

With the political pressure mounting on all banks to pass on the full benefit of further easings of monetary policy, two of the major banks have taken drastic steps to protect their funding margins by slashing deposit rates. 

From this morning, National Australia Bank will slash the rate it pays on three month fixed term deposits from 4.2 per cent to 2.1 per cent. 

The NAB move comes after more aggressive repricing by Commonwealth Bank in recent weeks in which it slashed its three month fixed term deposit rate from 4.2 per cent to 1.5 per cent.

http://www.news.com.au/heraldsun/sto...67-664,00.html


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## Prospector (31 March 2009)

nunthewiser said:


> Gday sir O . does the break fee actually apply if the loan is payed out in full ?




Yup!


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## nunthewiser (31 March 2009)

Prospector said:


> Yup!





thanks....


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## Sir Osisofliver (31 March 2009)

Prospector said:


> Ah, here is one from a quick google:
> 
> http://www.quickdirect.com.au/Content/To-fix-or-not.aspx
> _In this article, we use Reserve Bank of Australia (RBA) data to go back through time and compare the cost of fixed and variable mortgages. We conclude that:
> ...




Hey you added a bit!!

Wow 83% of the time eh? I love probability stats like this. I note that the article doesn't say how much better off you would have been had you actually managed to time your entry correctly in Mid 03. I wonder what was happening back then eh? 

I mean sure if you just randomly throw a dart and say I'll fix my rate now thanks, quite possibly 83% of the time you'll get it wrong. But how well does that probability measure apply to something that has levels of correlation to other economic indicators?  

When the market bottomed in '03 and our economy once again started slowly heating up, do you really think that there is a 50/50 probability that rates would go lower or is the probability skewed towards a higher rate occuring over the next three years?

If you fixed your rate in Early 08 it's like getting into the market in November 07.  You'd probably decide that this share game thing was a waste of time because your timing was off. But being aware of your timing can give you a greater probability of success in loan management just as it can in share trading.  You just have to recognise the patterns.

Try using this data http://www.rba.gov.au/Statistics/Bulletin/F01Dhist.xls for a longer data set and compare that against what was happening at the time and see if you can find any meaningful patterns.

Cheers
Sir O


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## Sir Osisofliver (31 March 2009)

nunthewiser said:


> Gday sir O . does the break fee actually apply if the loan is payed out in full ?




As Prospector said Nun - they sure do...wanna know why?

Because you have the audacity to pay out the loan early (shock horror) they get the use of *your* security value for less time. So lets say you have a 400k loan on your 800 K asset.  That gives them the lending capacity to lend out a further 368k. (The asset value minus the ~8% bit they aren't allowed to lend out and keep in reserve). You win lotto and pay off the loan, suddenly they don't have the asset, so the loan of 368k has to be guaranteed from a different source.

The Break fee counts as pure cash to the bank, so that gets added to the *8% reserve *which makes their numbers look better. They only need a small amount of cash in this area to justify a larger amount of borrowings and hence your break fee makes up the difference in their lending values.

Neato Eh?

Cheers

Sir O


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## kincella (31 March 2009)

off topic...but where does you nic osisofliver come from ??


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## Prospector (31 March 2009)

Sir Osisofliver said:


> Hey you added a bit!!




Yeah, I find a statement that supports mine I am gonna post it in the required 20 minutes!



Sir Osisofliver said:


> Wow 83% of the time eh? I love probability stats like this. I note that the article doesn't say how much better off you would have been had you actually managed to time your entry correctly in Mid 03. I wonder what was happening back then eh?




The thing is Sir O, people buy a home when they need to buy a home; perhaps when they marry, leave home, separate, divorce or death.  The matter of timing is basically irrelevant - it is random.   Buying a house is not about timing the interest maze at all, it is about doing something that you need to do, at the time!  And what interest rates are doing at the time is way out of your control.

Investment Property - obviously different.  That you can time according to the market forces.



Sir Osisofliver said:


> Because you have the audacity to pay out the loan early (shock horror) they get the use of *your* security value for less time. So lets say you have a 400k loan on your 800 K asset.  That gives them the lending capacity to lend out a further 368k. (The asset value minus the ~8% bit they aren't allowed to lend out and keep in reserve). You win lotto and pay off the loan, suddenly they don't have the asset, so the loan of 368k has to be guaranteed from a different source.



So are you suggesting that they can use asset value of say my property, to lend out more to third parties?


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## nunthewiser (31 March 2009)

Sir Osisofliver said:


> As Prospector said Nun - they sure do...wanna know why?
> 
> Because you have the audacity to pay out the loan early (shock horror) they get the use of *your* security value for less time. So lets say you have a 400k loan on your 800 K asset.  That gives them the lending capacity to lend out a further 368k. (The asset value minus the ~8% bit they aren't allowed to lend out and keep in reserve). You win lotto and pay off the loan, suddenly they don't have the asset, so the loan of 368k has to be guaranteed from a different source.
> 
> ...




Thanks for answer

i knew all that regarding the onlending/credit side 

just was inquisitive if it was fully penalised, the early payout on fixed ( i have never had one nor read the "fine print"....


cheers


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## Sir Osisofliver (31 March 2009)

Prospector said:


> Yeah, I find a statement that supports mine I am gonna post it in the required 20 minutes!
> 
> 
> 
> The thing is Sir O, people buy a home when they need to buy a home; perhaps when they marry, leave home, separate, divorce or death.  The matter of timing is basically irrelevant - it is random.   Buying a house is not about timing the interest maze at all, it is about doing something that you need to do, at the time!  And what interest rates are doing at the time is way out of your control.




Ah emotion in buying decisions - don't you love it?? I'm forcefully reminded of the day I took my wife engagement ring shopping where we had carefully discussed the agreed upon process of laying out few dozen rings, and she picks the top five rings she likes (she'd learnt by then that trying to hint what she wanted was a bad idea). We walked in and about two dozen rings in... "That one".. "Ok lets put that one aside and.." "No....that one." "Are there a.." "That one. I don't like any of the others." "Yes dear"

Of course I understand that the choice of your PPR is an emotionally driven decision, but if you are going to hold that asset for a long period of time and have the sense to pick your fixing moment...why wouldn't you?? 







> Investment Property - obviously different.  That you can time according to the market forces.
> 
> 
> So are you suggesting that they can use asset value of say my property, to lend out more to third parties?




 Bewdy eh?  They lend *you* $100k and for doing so have *as security* an asset worth more than $100k Lets say $300k. So if you have as security an asset with an unused security value of $200k, they'll reserve a small portion (which they are required to do) and lend out the rest of it to someone else.  (It's not that simple of course - but that is the gist of it). For a slightly more in depth discussion (but not much) go read newbie lessons.

Cheers 

Sir O


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## Sir Osisofliver (31 March 2009)

kincella said:


> off topic...but where does you nic osisofliver come from ??




Ahem it was given to me by my clever yet sarcastic daughter as a character name from one of those online multiuser games thingies. Don't laugh or the bazillion level fighter will slash you into a thousand bits.


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## Prospector (31 March 2009)

Sir Osisofliver said:


> Bewdy eh?  They lend *you* $100k and for doing so have *as security* an asset worth more than $100k Lets say $300k. So if you have as security an asset with an unused security value of $200k, they'll reserve a small portion (which they are required to do) and lend out the rest of it to someone else.




  And here was I thinking I owned most of my home! 
 I agree that timing is an important thing, it is just the opportunity doesnt always present itself at the right time.

Your wife sounds an entirely reasonable person btw!


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## Sir Osisofliver (31 March 2009)

Prospector said:


> And here was I thinking I owned most of my home!
> I agree that timing is an important thing, it is just the opportunity doesn't always present itself at the right time.
> 
> Your wife sounds an entirely reasonable person btw!




Oh it gets better!  If they are greedy and short-sighted, they can also package those loans together and then sell the debt as an instrument for even more money..hello Global Financial Crisis.

My wife is an entirely reasonable person in any situation that doesn't involve jewelry, whitegoods, crockery, cutlery, floor coverings, computer equipment and any object with a connection to our darling offspring.  At least I was able to convince her that cars are a depreciating asset and she couldn't have a BMW no matter how cute it looks.

Cheers

Sir O


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## Julia (31 March 2009)

Sir Osisofliver said:


> At least I was able to convince her that cars are a depreciating asset and she couldn't have a BMW no matter how cute it looks.
> 
> Cheers
> 
> Sir O



Oh God, what a total spoilsport you are, Sir O.   Think of it this way:
Your wife driving a BMW would add immeasurably to your own self image.


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## nomore4s (31 March 2009)

Sir Osisofliver said:


> My wife is an entirely reasonable person in any situation that doesn't involve jewelry, whitegoods, crockery, cutlery, floor coverings, computer equipment and any object with a connection to our darling offspring.  At least I was able to convince her that cars are a depreciating asset and she couldn't have a BMW no matter how cute it looks.




Oh so she's a woman then:




Sorry Julia and Prospector but I couldn't resist.


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## Sir Osisofliver (1 April 2009)

Julia said:


> Oh God, what a total spoilsport you are, Sir O.   Think of it this way:
> Your wife driving a BMW would add immeasurably to your own self image.




So what you are sayining is the type of car my wife drives reflects on me?  If I get her a Stretch Hummer do you think people will mistake me for 50 cent?  WORD shorty WORD.

cheers

Sir O


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## Julia (1 April 2009)

nomore4s said:


> Oh so she's a woman then:
> 
> 
> 
> ...



Prospector might have some smart reply, nomore4s, but I shall just maintain a dignified, scornful silence.:


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## Prospector (1 April 2009)

Julia said:


> Prospector might have some smart reply, nomore4s, but I shall just maintain a dignified, scornful silence.:




  Actually Julia, I didnt have a smart reply which is why I remained silent!nomore4s is right!:    Sir O probably omitted clothing though!  Especially shoes and handbags!  Apparently.


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## Sir Osisofliver (1 April 2009)

Prospector said:


> Actually Julia, I didn't have a smart reply which is why I remained silent!nomore4s is right!:    Sir O probably omitted clothing though!  Especially shoes and handbags!  Apparently.




Um actually, she's not so bad on that front for some reason. Perhaps it's because we spend probably about the same amount of money per year on clothes. I buy two or three nice suits, a pair of jeans or two, a few shirts and ties, maybe a belt and shoes each year.  Call it 3 maybe 4 grand. She doesn't buy designer so she spends about the same.

Maybe I'm lucky   I think I'll go tell my wife I love her frugality with clothing.

Cheers

Sir O


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## Julia (1 April 2009)

Sir Osisofliver said:


> Maybe I'm lucky   I think I'll go tell my wife I love her frugality with clothing.
> 
> Cheers
> 
> Sir O



See?   Just a matter of looking at her spending from a different perspective.
Now she's frugal.  Wacko!


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