Using Interst rate derrivatives rather than fixing

michaels

Suppose you were on a tracker mortgage but wanted the certainty of a fixed rate - currently depending on deposit size it is possible to get a fixed rate of about 4% for 5 years subject to varoius fees.

However the libor rate is more than 100 basis points less than this. Would it be possible to get the same insurance by trading a financial product (like doing a swap) but do so much more cheaply?

holly_hobby

Tracker with the certainty of a fixed = old and sadly lamented capped rate ... sadly they are no longer around (who knows they may reappear)

LIBOR rate - the rate at which banks inter lend to each other. There used to be mge products based on LIBOR - currently not involved in mg placement so don't know if there are any current products available, an active mge broker will be able to tell you, but I think they bit the dust a little while ago.

So you are left with a tracker ....

Same old addage, if you need to budget go for the fixed (which I think are probably about they lowest they will go, but who knows if the lenders need to supplement their book they may offer a good low rate for a low ltv for premium business).

If you have the nerve and the budget to absorb any increases on the headline rate, go for a tracker, BOE have held and continue to keep base at 0.5% - and based on the current market conditions and recovery I certainly think that this will hold for at least the remainder of the year. But no one can accurately state what WILL happen with interest rates - one can only speculate and keep everything crossed !!

Hope this helps

Holly

TrickyDicky101

No it won't be possible for you as the fees/rates you would pay for trading any kind of derivative on your own account would outweigh any benefits that could potentially accrue. You as an individual are not worth much to any financial institution.

michaels

I guess that was my question - how would the fees for hedging the risk compare to the fees and margin of having a fixed rate mortgage?

Obviously it would not be worthwhile doing the 'swap' yourself but perhaps it would be possible to in effect 'insure' yourself against rising rates using a derivative product more cheaply than by using a fixed rate mortgage - although it might of course require a large up front payment that not everyone might have.

I seem to remember there was a company offering such a product but can't find it now.

TrickyDicky101 wrote: »

No it won't be possible for you as the fees/rates you would pay for trading any kind of derivative on your own account would outweigh any benefits that could potentially accrue. You as an individual are not worth much to any financial institution.

TrickyDicky101

michaels wrote: »

Obviously it would not be worthwhile doing the 'swap' yourself but perhaps it would be possible to in effect 'insure' yourself against rising rates using a derivative product more cheaply than by using a fixed rate mortgage - although it might of course require a large up front payment that not everyone might have.

This is exactly what you do when you take out a fixed rate mortgage with the bank!