hedge against interest rate rise 2004

[tonyc00]

Hi. I've got five investment loans - Prof loan package at var rate 5.97%. I believe that rates will rise in 2004 and through to 2006. The prof package I'm on doesn't offer a fixed rate, and I don't want to incur the expenses of moving to a lender that offers a fixed rate.

Question. I want to "hedge" against a interest rise ?; can anyone give me advice if they have done it, and if so, with whom ?

Thanks

Tony

[perky29]

Hi,
If this is the "professional pack" that offers .7% off the variable and is with one of the major banks - my broker has told me there is a chance that they will review this soon and may also end up applying the .7% off to their fixed rates (eg 5yr at 6.69 will then be 5.99%)...there's your hedge.
Have you heard the same rumour Rolf?

[Lotana]

I asked my personal banker at AMP this very question and had a negative reply.

Cheers,

Lotana

[Rolf Latham]

Hi Perky

The margins on fixed rates are not that fat.

If you can get 15 points off youre doing well, and at 25 really well.

At .7 off they would be paying you to lend the cash.

Note that most pro packs are discounts off fully featured products and so therefore are sort of cheapish.

A good example is ANZ, you can get Money Saver at 5.97 or Standard variable with offset at 5.97 if your borrow is > 250 k.

No real difference in cost to you just a better product at a lower rate than the rack rate.

Ta

rolf

[perky29]

Thanks Rolf,
Maybe fix in a few months when fixed rates drop a little more would be the go - I think there is a pretty good chance that they may drop a little more....who knows?:)

[Rolf Latham]

Hi Perky

Fixed rates are trending down, some seemingly good rates with 5 year lock downs just a whisker above 6 %. cant see these coming down more unless the underlying current cash rate moves.

As I type this the average of th 5 year fixed market is at the rack rate for normal variable product - interesting times.


ta

rolf

[yeslist]

Hi All
What do you think the reason for low long term rates are?
Is it that there is so much money out there to give away that the lenders are forced into lowering the long term rates just to get a return? Or is there some other reason?
Y

[tonyc00]

Hi. Thanks for the replies, but without seeming ungracious (honestly), I don't think anyone came near to answering the question.

Specifically is there anyone out there who will "hedge" against higher interest rates ?.

In other words I'm NOT asking whether interest rates will increase/decrease in the near term or whether it is opportune to fix or not.

Thanks Perky29, it would be good if Westpac would offer the same Prof package with the option of fixed rates. I guess a broker would know but that's a different question.

Anyway back to my "hedge" question - any relevant comments ?

Thanks

Tony

[Rolf Latham]

Hiya

Many of my clients are locking in to 3 and 5 years rates.

These tend to be the ones that have a fair bit of exposure relative to their incomes and assets. A protracted spike of rates above 8 % would force them to sell stock in a flat market. not something they would like.

ta

rolf

[geoffw]

Originally posted by tonyc00
Hi. Thanks for the replies, but without seeming ungracious (honestly), I don't think anyone came near to answering the question.

Specifically is there anyone out there who will "hedge" against higher interest rates ?I won't be just at the moment- but just because I'm already on fixed interest rates.

I think my first expiry will come in about July. A lot can happen between now and then.

[Macca]

Perhaps Tony is now on the grog or tearing his hair out

What he has asked twice, and is still to be answered, is that he is in a situation where his loan package does not allow him to fix his interest rates. And he would like to know, does any one know how he can do that or create some form of protection to protect himself from interest rate hikes.

I don't know the answer, does anyone else know?

[XBenX]

everyone is just assuming he would refinance

why not do that....

the other option for hedging (without refinancing) lies in the bond market - but i dont really think it is a good option

[Rolf Latham]

Hi Macca

Actually, his loan package does allow him to fix the rates, its just that the discount applied is negligible or nil.

And... without knowing where he is at the mo and etc its nigh impossible to suggest viable options.

Maybe stay, maybe refinance, maybe a mix


ta

rolf

[tonyc00]

Thanks Macca, for a while I did feel like I was asking in swahili.

Your restatement of the question was spot-on. I've now given up and (sorry) gone to another forum. Macca, if you get an answer contact me.

Likewise if anyone wants to know the answer - where and how to hedge against an interest rate rise - then contact me. I may not know the answer now but I will by the end of this week.

If they know the question, they'll understand the answer.

Who knows in 2004 then may then others will be asking the same question !!

Rolf, many thanks for your generous reply but I'm not sure what the question was to which you provided the answer.

Regardless of whether I'm right or wrong, I merely wanted to know with whom one could "hedge" against an interest rate rise.

Thanks to all concerned but I reckon I've done this topic to death.

Tony.:D

[Crystal]

Hi Tony,
Try searching the archives as there was a discussion a while ago regarding hedging against inflation.
Cheers,
Crystal

[brains]

Tony,

The point here is that everyone understood your question but didnt know the answer and instead of saying that, they just waffled on. (exept Macca)

I dont know the answer so decided not to post until now.

[Kevmeister]

Likewise if anyone wants to know the answer - where and how to hedge against an interest rate rise - then contact me. I may not know the answer now but I will by the end of this week.

Tony, in keeping with the spirit of the forum - why not post the answer here (or a new thread) rather than resorting to private communications?

[XBenX]

im confused....

ahhh ok its all clear now, you want to be spoon fed the answer...

the problem is not the anwsers it is the question, ask a better questions get a better response.

Everyone posted great responses but if you asked the question better you would have got the response you were after.... the problem lies with the "hedge" and peoples definition of it....

essentially you want to stay with your current lender but hedge against possible interest rate rise

that questions has been answered, you can either keep complaining about not getting spoon fed an answer or ASK a better question

ppl amaze me, the want something, they want it for free and they arent even polite !

[brains]

You're just playing with words there Ben, The point is noone knew
the answer and sort of thought that fixing his loan was the answer. But i accept your point that he wasnt real grateful for at least a few replies.

[tonyc00]

Honestly I was grateful for the replies, I just didn't think some of the replies were relevant. Was it wrong to say that, obviously one person believes that.

Anyway thanks Brains and Macca for supporting me on that.

And I will post the answer (when I find it) because I think that in the spirit of the forum it is the right to do.

Thanks Crystal for pointing me in the right direction.

But guys (& gals), try to stay focused on the question, and if it (the question) is not obvious then say so, don't waffle on, AND don't get tooo sensitive - this is not life or death stuff - take a deep breath, exhale, and relax, then type away.

This too will pass.

Best wishes to ALL.

[XBenX]

Originally posted by XBenX
everyone is just assuming he would refinance

why not do that....

the other option for hedging (without refinancing) lies in the bond market - but i dont really think it is a good option

ok, my bluff has been called, im too helpful for my own good

the answer is above....

/me puts down the spoon


ASK a better question :) you still havent done that

[Bill.L]

If your that certain that rates will rise then sell a 10 year bond futures contract(or several). The futures game on bonds is buy if you think rates are going lower and sell if they are going higher. However you lose big if you are wrong.:D

bye

[Jamie]

Hi tonyc00

Welcome to the forum... 2 days and youre already telling us we dont live up to your expectations... You must know my ex-girlfriend... :eek: :eek:

Ill try a little harder... :o

What do you define as a hedge?

Now, you mention your loans but not your exposure...

You dont mention why but... why are you sure of the int. rate rise?

If you are so certain, why not lock in 5 years at the current rate (around std var.)?

If you are so sure of the rate rise, arent the break costs simply the real cost of "doing business"?

What are the break costs of your current loan?

Are they all residential?

Are your loans cross-collateralised?

How are your properties performing? (If they are all +cashflow by a fair margin, then the rise shouldnt worry you too much... if all 5 are -geared then your approach will be different?

Jamie :D

[XBenX]

right on Bill L

jamie - i find it amazing that someone who has economist listed in their profile doesnt know about the bond market / interest rate interactions - maybe i should go lecture at harvard ? thats where you studied right, whats your background ?

<edit> deleted more petty remarks

you have an answer now, welcome to the forum - hopefully you can contribute

[Ajax]

Can someone a bit more financially savvy than me explain interest rate caps?

Assume I have $1m in borrowings all at variable rates, believe interest rates will rise over the next 5 years and am willing to pay a premium upfront to a merchant bank to cap the rate (and effectively hedge the interest payable on my variable loan for 5 years without fixing).

I note that premiums for interest rate caps are quoted daily in the Financial Review. Does anyone here hedge their interest payable in this way? Do you have difficulty negotiating margins with the merchant banks?

[Big Pete]

Hi Tony

any luck with finding a private interest rate swap .. I beleive banks arrange these for corporates .. and would be interested to know if you've found any 'deal makers'

regards