Mortgage Carry Trade

Snugbugrug28 · 05-12-2021 1:49pm #1

With mortgage interest rates being historically low (althought relatively high in Ireland) together with the advent of 20 years mortgages, could it be feasible in the next 20 years to perform a risk free carry trade using your mortgage loan as the base, example scenario below:

1. Take out mortgage for 25 years with 2.6% interest rate

2. Use any spare cash to overpay mortgage until

3. Saving rates (after Dirt) go higher than fixed interest rate

4. Then start to save spare cash into savings, ready to be used against mortgage at a moment's notice

Effectively if savings rates went high enough you would be reducing your mortgage interest rate by the difference. With inflation looming does anyone see interest rates getting high enough for a savings account to beat an Irish fixed rate (2.6%)?

cfingers · 05-12-2021 1:58pm

If deposit interest rates start to rise I would imagine that mortgage interest rates will also rise. Unlikey to get better deposit interest than mortgage rate except for some marketing initative from banks or some ssia or similar from government.

Mongfinder General · 05-12-2021 2:03pm

Possible but not probable - the ECB are refusing to budge on interest rates even in the face of rising inflation.

Not sure Banks will start offering any real returns deposits any time soon - the competition just isn’t there.

05-12-2021 2:28pm

The rudimentary credit institution model is that deposits are taken to fund loans. Interest gained on loans is then used to fund deposit interest. The difference between the two is the profit for the institution.

Obviously banking is much more complex than that these days but I'd be shocked to see deposit interest overtake loan interest rates. As cfingers said, unless it was dictated by the government for some reason, I can't see lenders changing the fundamental methods for setting interest rates.

Snugbugrug28 · 05-12-2021 5:21pm

https://www.boards.ie/discussion/comment/118271785#Comment_118271785

The key element is having a 20 year fixed rate where you have spare cash left over to invest

Snugbugrug28 · 05-12-2021 5:23pm

https://www.boards.ie/discussion/comment/118271922#Comment_118271922

It wouldn't though. In a 20 year fixed rate scenario the mortgage rate would be frozen in time while the prevailing variable rate would be going up with the ECB. This is what could present a scenario where savings beats mortgage.

3DataModem · 06-12-2021 12:12am

When a bank offers you a 20 year fixed rate, they effectively price in this "risk" (or more accurately, hedge against it).

And bear in mind, you won't be able to overpay a 20 year fixed rate.

Snugbugrug28 · 06-12-2021 12:56am

https://www.boards.ie/discussion/comment/118275289#Comment_118275289

You can overpay with Finance Ireland up to 10% of the value of the mortgage once per year. The difference in their rates between best and worst fixed rate is 2.25 vs 2.6.

The question really is do you think rates in savings accounts might go above say 3.6 (to take account of Dirt) at any point in the next 20 years. QE, Pandemic spending.. all these things carry a risk for inflation that could push up rates

Jim2007 · 06-12-2021 9:00am

https://www.boards.ie/discussion/comment/118275289#Comment_118275289

As someone who used to sit on the other side, I’d say: not really because there is no intention that they will carry the risk. The emphasis is on the short term gain, ultimately the decision makers won’t be around in 20 years time so next year’s bonus will be the horizon. So long as the risk model is acceptable and it will be, it will fly.

Reading the T&C for the product it looks like something that will be very easy to securitize or alternatively some kind MBS product will be sold to underwrite it.

Mortgage Carry Trade

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