Coffee Talk : Mortgage Secrets Of Rich People
I had coffee with a wealthy old friend the other day and he revealed he was renovating his second GCB in the Bukit Timah vicinity. He assured me the first one which I like very much is still around, private lift, walk in cellar and all. Art gallery moving to the new one with him.
So we know he is rich although not as rich as someone else who had bought his own bulldozer for his renovations because it worked out cheaper (please don’t be reading this !!).
Is that how they stay rich ?
End of their story.
I do know that the mortgage market is 2 tiered. Rich people do not have to take normal mortgages like everyone else. They can choose to hedge their mortgage rate whenever they want, into fixed or float and, for whatever tenors with interest rate derivatives.
So he was asking me if he should hedge his loan of several millions into a fixed 5 year loan because currently, he is paying 3M Sibor +0.70% which works out to be roughly 1% every quarter.
Now, you may ask me why would a wealthy guy be having a mortgage, and a mortgage for a second GCB. Well, because it is free money. And I wish I had a mortgage too because whatever I make above 1% (his funding cost), is my PROFIT !
I do not want to be seen griping here, so there.
I worked out. He pays 5Y interest rates at 1.03% (current market for interbank derivatives). In the IRS (interest rate swap), you pay fixed vs receive 6M SOR float rate which means 1.03 – 0.45% (using current rates) = 0.58%, semi annually.
Cheap, cheap, cheap. Until he found out his bank was going to charge him just about 1.25%. Ok, not too bad. Still 0.8% semi annually. Buy a nice bond and that is 4% per annum. Enough for a new 6 series, at least.
I understand that some of my other friends are paying normal mortgages. The usual local bank deal. 3M Sibor plus plus plus. They have no access to the “hedge” game that rich man has.
Not jealous although I could live off 4% on several million each year.
I disagree with this somewhat. I do not think that the “poor” is disadvantaged.
Anyone could take up a fixed term loan if they want to hedge their interest rate exposure and they would be no worse than doing the IRS. Funny thing, many people are taking floating rate loans with eyes wide open. Who isn’t a central bank expert, interest rate trader…?
Everyone I know that has a mortgage thinks that interest rates will not go up, ever.
But if its a typical IRS, then the payer will Receive float leg. The banks are ripping off people with the fixed rate mortgages that include spread and on top of that, they keep the float leg not to mention, the lock in periods.
I am just slightly dismayed that our mortgage market has not developed over the years to come close to other developed countries in allowing consumers the flexibility in managing their mortgages.
Guys if you would all please enlighten me.
1) fixed rate loan is different from IRS
2) if yes, which one is better
I do agreed with trade haven regarding mortgages as this is something I learned from my super rich boss. Pledge your house to the bank at 1% and use the cash to buy a few decent bonds at 4%. Of course I didn’t make enough to buy a new 6 series but probably enough to pay for the COE.
You are a star !
Also, IRS is a trade-able derivative. Means you can buy or sell. If you qualify as a professional investor, it can be a product class you can use to hedge your portfolio.
When you engage in paying a fixed rate, you will stand to gain the float rate which is the 6M SOR.
The difference is your gain or loss. In an upward sloping yield curve, it would naturally be a loss. For an inverted yield curve (like the AUD or NZD), it could be a profit for the time being.
$1M Fixed Mortage at 1.25% for 5 years ( not sure if this rate is open to retail customers though )
Assuming 6M SOR is below 1.25%, I will pocket a maximum gain of 0.8 % which work out to be $8K per annum.
Is my assumption correct ? Can I also pledge my investment portfolio ( stock, bonds etc ) instead of a physical property ?
Its a loss, friend.
You pay 1.25% for 5Y and receive 6M at say, 0.45%. So you lose 0.80% and that is your interest cost.
It is possible to pledge your investment portfolio, I suppose, but I am not sure how much they will lend you against it. I assume good quality assets should qualify for a higher loan.
You will have to consult your bank about it. (there are some new regulations out there that I dare not flout by advising you). 😉
Good luck !