hedging interest rates yourself

Posted by aussiebiscuit (335 days ago)

hey guys i'm considering buying a property in HK soon but i'm really paranoid that u can't fix u're rates like u can in oz and i'm really worried that the rates will go up especially since HK currency is pegged to the US... so i'm racking my brains trying to figure if there is some way i can hedge itmyself...

i'm thinking of shorting a US treasury with the notional size of the bill the same as the size of my mortgage. hence if rates go up the bond should decrease by the same amount as the excess interest i have to pay.... do u think it would work? i'm thinking of shorting the bonds using cfds that u can get at www.igmarkets.com.au

of course i'm assuming the peg for the USD to the HKD will remain for some time.

can someone pick a hole in what i'm doing and why it won't work? thx.

Posted by Havefaith (334 days ago)

One thing we are doing for our property in Australia is borrow in Yen (at about 1.5%) and then we have bought some stock/funds in Yen to hedge our position - just in case the currency appreciates alot over the next few years.

Posted by aussiebiscuit (334 days ago)

how do u take a retail loan in yen?

Posted by Havefaith (334 days ago)

Some of the banks will give you a mortgage in a different currency - Llodys bank, Barclays, some of the Aussie banks, etc.

Posted by walkup (333 days ago)

For foreign currency keep it simple. Think in pairs ie for you Australian Dollar and HK Dollar. If you are paid salary in Oz money and you want to minimise currency issues then borrow the money in Oz and transfer to HK for the purchase. If, on the other hand, you borrow the money against the property in HK and in HK$ and you are worried that the Oz dollar will slide in value against the HK $ then you could ask a bank for a hedge quote, but note that if the loan repayments go up for you on OZ dollars you will also benefit from an increase in the value of the property, so on some way you are already hedged and what you are doing is just spending more money on an additional insurance policy.

Posted by walkup (333 days ago)

...OK there is the scenario that interest rates in Oz $ balloon and you are tempted to go for a yen loan but now you are betting that the yen will not go up and you are messing in 3 currencies...is this what you want?

Posted by glorypc (331 days ago)

Would definately advise against Yen on Aussie property at the moment. The Yen has never been weaker against AUD and although in the short term it may continue on this trend eventually it will strengthen/AUD weaken and you will owe more on your property.
A hedge in Yen may look nice on paper but the bank coming knocking on your door asking for money as they have made a margin call and you now owe less then 25% of your property certainly wouldn't be nice.
Don't get me wrong, multi-currency mortgages are great you just need to minimise the greed factor and decide upon the currency to draw down in for the right reasons not the cheapest.

Posted by Havefaith (331 days ago)

Glorypc,

Would you still advise against Yen loan on a Aussi property if we hold funds/stock in Yen that is sufficient to cover the loan?

HF

Posted by walkup (328 days ago)

The issue here havefaith is not so much whether you have funds in Yen, but from where the loan is being repaid. If the Yen funds are liquid and are being used for the loan repayment then yes, but then why not turn them into cash now and use it to pay for the purchase without a loan? There was a nice quote in the FT last week that the only perfect hedge is in a Japanese garden :-)