Question: I have always wondered about hedging against a rise in the interest rates, and if it was possible? I am not referring to refinancing my loan, I was generally curious to know if people had the option to do this even otherwise. Yes, I won’t deny that I am thinking about refinancing my loan to the existing interest rates. If there were other venues open, I would like to compare and study the same so I will make the most of my finances, and one that will allow me the ease of migrating to a lower interest rate scheme, thereby saving me some funds in the process. Please advice. Thank you!
Hedge Against Rising Interest Rate
Answer: Refinancing for a property can be quite a daunting task for anyone, irrespective of their age or the amount of the money involved. Therefore, it is not surprising to read about your query on hedging against a rise in the interest rates. Once you decide to go for refinance, the interest rate might move higher and this in turn will increase the cost of the possible new lending scheme, going on to a point where it becomes difficult and unappealing. So, may opt for hedging the interest rate, sometimes while using the fixed kind of income instruments, otherwise referred to as interest rate swaps. When a person buys bonds for a short term pierod or if they decided to enter into interest rate swap with fixed for a floating plan, they succeed with the plan.
Say, for example, a person who has borrowed money decided to refinance their property with $100 in a new debt, and then they have a natural hedge of 50% and hence would have the need to lock the interest rate at 50% of the new financing amount so they are completely protected. This is the one modus operandi that most borrowers adopt to manage their refinancing plans. This way, they wil have enough money to tide over and not worry about battling with increase in interest rates.