Mortgage borrowers are now considering hedging against rising interest rates. HS’s interest rate calculator gives an indication of when the interest rate cap is profitable.
Interest anticipating the rise has led people to consider hedging their mortgages.
The question is: how much must interest rates rise in order for the interest rate cap sold by banks to be profitable?
Interest rate mathematics is a genre in its own right, so there is no one-size-fits-all answer to the question.
In principle, the profitability of the interest rate cap should be calculated separately for each loan, and the final answer to profitability will only be obtained once the interest rate hedging period has expired.
The prices of interest rate hedges and the size of the interest rate cap vary from one loan to another.
HS: n however, the interest rate calculator gives an indication of when the interest rate cap is beneficial.
The HS calculator assumes that, without interest rate hedging, the loan margin is 0.7% and the reference rate is always at least 0.
The calculator’s interest rate cap is based on sample offers from banks that reflect the average prices of interest rate hedges currently sold by banks.
Banks set a price on the interest rate cap that is paid either in the margin or in a lump sum. In this example, the price cap is 1.3 percent, which includes the loan margin plus the price of the interest rate hedge set by the bank.
During zero interest rates, the total interest rate on a loan with an interest rate cap is 1.3 per cent.
The interest rate cap is set at 1%, ie the reference rate based on Euribor cannot exceed 1%.
At its highest, the interest rate on an interest-hedged loan could rise to 2.3%.
If Euribor were to rise by as much as two per cent, the total interest rate without interest rate hedging would be 2.7 per cent, but with an interest rate cap it would remain at 2.3 per cent.
#Interest #counter #tells #interest #rates #benefit #interest #rate #cap
