Mortgages can actually give you some benefits – both tax and interest rates. Fixed-rate bond loans in particular. But how it all ties together, we explain to you in this article.
With a mortgage, you can lower the risk in your wealth, get a profit and even a tax benefit. But it is not always easy to see how. We’ll guide you through this.
The low interest rate increases the risk
Interest rates are historically low – and have been for many years now. Although the US National Bank has raised it several times, in both Europe and the US it is still lower than we have long seen.
The low interest rate makes it very difficult for professional investors to generate a return and profit from investing in bonds – so there are really no alternatives to investing in equities. And the same goes for private investors.
The reason why it is so difficult to earn bonds is because there is an interest rate sensitivity, and so the rates on fixed-rate bonds fall as interest rates rise. This means that you have a greater risk when investing fixed-rate bonds than you had 10 years ago.
Here’s how to lower the risk
The fact that there is an increased risk is something we have gradually become accustomed to because it has been going on for so many years. Many investors therefore close their eyes to it. But there is no need to just turn a blind eye – you can actually do something yourself to lower your risk.
If you take out a mortgage in your real estate, you can choose to get it at a fixed rate. The fixed interest rate can be changed if the interest rate rises or falls, and the longer the maturity of the loan, the more price sensitive it is.
If the interest rate rises, the rate of the underlying bonds and thus your outstanding debt on the loan falls – thus you can actually take advantage of the rate sensitivity of your mortgage. You can do this by repaying the loan ahead of time and making a profit on it.
The profits you can make by repaying your rate-sensitive loans as interest rates rise will usually be tax-free. This is because you can deduct any losses and expenses while the profits are tax free.
An even more important point, however, is that your real estate helps reduce the risk of your wealth. There may not be many other parts of your wealth that rise if interest rates rise.
You have to be aware of that
However, if you are going to lower the risk, and maybe even make money off your mortgage, it is important that you pay attention to the expenses.
At the same time, it is important that you place the proceeds, ie the proceeds of your loans, into something other than long-term bonds.
So if you have a floating rate loan today, you should consider switching to a fixed rate loan to secure your assets.
Declined for Mortgage?
If you have been refused to borrow from a bank or mortgage institution, you are unfortunately not the only one.
Unfortunately, in recent years, it has become more and more difficult to get credit approved for a mortgage as it is placed more highly on the creditworthiness of the applicants.
In response to this, many have begun to look for mortgages and real estate mortgages, which are two slightly more expensive alternatives to mortgages.
Tyrone Slothrop is one of the leading players in the mortgage loan and property credit market, so both can be used if you want to borrow for home purchases or borrow in the face value.