How can i hedge my mortgage when interest rates start to rise?

Discussion in 'Investing and Retirement Saving' started by Simrin, Nov 10, 2015.

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  1. Simrin

    Simrin Newbie

    When you take out a mortgage there are a lot of risks associated with it. There is risk from interest rate movement which can fluctuate during the lifetime of the mortgage. At the moment rates are low and many people are enjoying paying less to live in their homes however this cannot last forever.

    With historical lows when it comes to borrowing money it is just a matter of time before the economy overheats and interest rates start to rise again. Many people ask how to hedge your mortgage and there are simple strategies you can use.

    #1: Fixed rate

    If you are worried about a rise is the base rate then it is prudent to fix your rate so that you know what you will be paying in the future. If you are on a variable then the fixed will only be slightly higher and you have the peace of mind of knowing what your outgoings will be.

    #2: Savings

    If you have a lot of savings then you might consider paying a large chunk of your mortgage off. By paying off a significant amount the monthly repayments will fall and when the rates do rise you will go back to normal where payments are concerned.

    If your mortgage is for $100,000 and you have $50,000 then the amount you earn in interest will be lower than the amount you have to pay therefore it makes sense to pay off the amount you borrowed on the property. Make sure you keep some of the money set aside as an emergency contingency.

    3: Stocks & Shares

    You can look towards the stock market to see if you can hedge against interest rises. Some stocks rise significantly when the Central banks announce a rise and you should target these companies so that you can make money if it does really happen.

    Stocks such as banking and credit card companies rise significantly on news like this so when you think the increase in rate is imminent buy these stocks and shares. If you do make a profit then you can use this to make the extra payments that are required for the mortgage.

    #4: Rent a room out

    You can rent a room out to generate more income if you think you’ll have to pay more in the future. By getting a lodger you can use the extra funds to make over-payments which will reduce the life of the mortgage and you will be paying less in the long run.

    #5: Make over-payments

    The best way to reduce the amount you own on your property and hedge yourself from interest rate rise is to make significant over-payments. If you pay $1000 towards your mortgage then on a 6% deal you will have to pay $800 in interest charges that go into the banks profit, $200 will go towards reducing the principal of the loan. If you can pay more each month then you will be saving more money.

    Overall there are many things you need to think about when hedging yourself against interest rate rises and the best way to do this is follow some of the points outlined above. By planning ahead you can really save money and you will have the peace of mind that the future of the home is more financially secure.
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