Possible to buy a fixed rate option on mortgage rate for future house purchase?

jsinc

Hi,

Been researching this area but not finding any info. via the main banks.

I'm looking to buy my first house, but believe prices will fall further so putting it on hold for the time being. However I also think today's fixed mortgage rates (5-10 years) are about as low as they will be for some time to come and I'd like to eliminate some risk for the future.

So in an ideal world I'd like to pay an upfront premium to a bank to (for example) lock in today's 10 year fixed mortgage rate by buying an option on that rate for a certain period in the future. That would mean if rates do go up I could revert to the contracted rate (by paying the premium) and if rates go down the most I'd have lost would be that premium (so it would dpend on how much the premium was really).

Does anybody know if this is possible?
Thanks.

nw_man

Dont think so, I have certainly not heard of it.

thriftymomma

I've never heard of a product like this either.

jsinc

Thanks for the replies - yet to find anyone who's heard of something similar and phone calls to banks just hit upon 'never heard of that'. Seems a shame though as it's possible to buy insurance/payment protection on just about everything else - except that one expense (a mortgage rate) that will be my biggest cost/risk in the future.

ln1234

jsinc wrote: »

Hi,

Been researching this area but not finding any info. via the main banks.

I'm looking to buy my first house, but believe prices will fall further so putting it on hold for the time being. However I also think today's fixed mortgage rates (5-10 years) are about as low as they will be for some time to come and I'd like to eliminate some risk for the future.

So in an ideal world I'd like to pay an upfront premium to a bank to (for example) lock in today's 10 year fixed mortgage rate by buying an option on that rate for a certain period in the future. That would mean if rates do go up I could revert to the contracted rate (by paying the premium) and if rates go down the most I'd have lost would be that premium (so it would dpend on how much the premium was really).

Does anybody know if this is possible?
Thanks.

There is something similar - it's called an Interest Rate Swap, but I doubt a financial institution would set one up for the lay investor.

hearts

Take a low fixed rate and overpay. Then when/if they go beyond what you expect, you will have less to repay so payments less. Same result I would have thought ;-)

TEDDYRUKSPIN

No! Not available for the normal consumer. Banks will not keep hold of a rate of a bulk of cash if they can make interest on it from other clients.

I am greatly assuming you mean mortgages right?

As from what you are typing up, you sound like a gambling man who buys futures and options.

payless

There is aproduct product that does something like this - BUT only for a 2 yr term and as its set as an insurance policy - you must only be insuring an acrtual risk ( ie already have a mortgage in place that on a variable rate ) so whilst maybe good for those on a low margin tracker , no good for OP.

---

do do this then yes its an like an option on Interest rate swap trade ( or poss a sterling short)- that would do what you are after - remember seeing HSBC say they did them for customers over £250K but woukld assume its stil less than 2 yrs

Suppose something could be cooked up with derivate trading on gilts ? but now getting complex and other risks would come into play

jsinc

Thanks for the new replies.

In1234 - An interest rate swap wouldn't really work (and they're not available for normal customers) as even in principle it would tie me in today to monthly interest payments today (and they're leveraged). I was hoping there would be a product available to enable me to lock in a certain fixed rate for a period of time by paying a premium (like the options foreign exchange brokers offer on currency transactions), but doesn't seem to exist for interest rates products.

hearts - I would if I were buying today, but although I think today's rates are about as good as they'll get for a while I also think house prices in my area will fall more over the next year so don't want to purchase a house yet (I'm a FTB who's been waiting a long time...)

Teddy - yes I do mean mortgage interest rates. I'm not really a 'gambling man' as such, but I think I have to take a view on where mortgage rates are heading and generally take great interest in hunting down the best financial options. I know what you mean about banks not wanting to hold a pot of cash, but the option I would buy from a bank wouldn't be free - I'd be paying them a premium to lock in a rate.

payless - thanks. Can you tell me what institution offers that first deal? Although I'm looking for something longer than 2 years and don't currently have a property it may be worth having a chat to them anyway (and HSBC). 'Like an option on interest rate swap' (a swaption) - yep that's quite similar to what it would be. The problem though is that longer-term mortgage rates haven't really tracked swap rates too closely for a while (credit issues etc). Sterling short (via rates), inflation-linked, selling gilt futures are other possibilities but problem with those is then I have a running, leveraged exposure with margin issues rather than an option I can exercise/not - and again they don't really track mortgage rates closely enough.

Seems I need to just keeep asking around. Cheers to all.