Most people who have LVR’s on the higher end of the spectrum are quite sensitive to interest rate rises from a cash flow perspective. A 2% rise on a $1m debt is an extra $20k per year of outgoings which can turn a balanced portfolio south in no time at all.
To me it makes sense to hold a short position on a government bond at a level which reflects your debt. That way if the cash rate goes up, your bond face value drops, negating the effect of a rate rise on your loan. Surprisingly I can’t find a huge amount of information on people employing this strategy.
I am interested to know if anyone employs this or other strategies to hedge interest rate risk.
Simon Plummer | SP
https://www.sp.com.au
Email Me | Phone MeSP
Good to see someone thinking about risk management – very important, particularly in the middle of a boom.
Fixing interest rates on parts of your portfolio is a quick trick. Doing so, allows you to ride out a period and adjust your lifestyle/finances accordingly.
Cheers,
RedomRedom Syed | Confidence Finance
http://www.confidencefinance.com.au/
Email Me | Phone MeHome Loan Specialists based in Sydney, serving clients Oz wide.
Thanks for your comment Redom.
My investment horizon is a lot longer than the 5 or so years lenders will generally fix for. I guess I am more interested in a hedge which is not limited to a time frame like this.
Simon Plummer | SP
https://www.sp.com.au
Email Me | Phone MeSP
Fair point Plummer. You could get 10-12 year fixes too though. To be honest i haven’t heard much about the mentioned strategy before. Would love to hear more from you and others. :)
Perhaps investing in asset classes that move in the opposite direction to economic conditions? I’m not too aware of this but: gold, gambling stocks, alcohol stocks?
Cheers,
RedomRedom Syed | Confidence Finance
http://www.confidencefinance.com.au/
Email Me | Phone MeHome Loan Specialists based in Sydney, serving clients Oz wide.
Live in America :)
We locked in 4% for 30 years……..
30 years!! That’s crazy talk! :)
That would definitely make life simpler.
Simon Plummer | SP
https://www.sp.com.au
Email Me | Phone MeSP
Good day,
Short position on bonds (as well as any income assets) is quite expensive because you have to pay to lender 100% of income from these securities.
There are 10 years bond futures on ASX, maybe they will more appropriate solution because you don’t have to pay interest and get very nice leverage (25 to 1 or more) so you’ll need just $40K to hedge $1M
However, prime rate may be included in future’s price, so holding this position will cost you just prime rate that is usually lower than bond’s interest rate.
Another disadvantage is that futures have maturity date (3-6 months) so you’ll have to roll to a new contract when the old one is about to expire.
I have big experience with hedging currency risks with futures and I’m thinking about hedging property prices/interest rates with it after I move to Australia this autumn.
Dear investors, does anybody use futures to hedge interest rates here?
Best regards,
AlexanderRussianAussie (QLD)
https://www.facebook.com/sanderinozFeel free to write me a message or add me in Facebook to chat about property investing
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