Definition of Loan Interest Rate Swap

An interest rate swap is a financial contract between a cooperative housing association and a bank. Swap is an English word that means exchange, and that’s exactly what an interest rate swap is namely an interest rate swap.

Has a cooperative for example a Dali loan, the association can conclude a contract (an interest rate swap) with the bank for a fixed rate instead. The association keeps the Dali loan at the variable rate, but it is now the bank that has the risk of interest rate hikes. Similarly, the bank is scoring the gain as long as the Dali loan rate is lower than the fixed rate that the association has to pay to the bank.

Mortgage Bank and Bank make an agreement on interest rate swaps, where the association pays a fixed rate to the bank while the bank pays the variable interest on the existing mortgage loan association.

 

Advantages and disadvantages of interest rate swap

An advantage of interest rate swaps for a cooperative is to remove the risk of interest rate increases. It is the bank that takes the whole risk. On the other hand, the interest rate that you have to pay to the bank is often significantly higher than the interest rate on the existing often floating rate loan. Thus, you pay a premium to secure against interest rate hikes.

This is no different than for fixed-rate loans. Here the interest rate is also higher than, for example, Dali loans and mortgage loans. Therefore, an interest rate swap largely resembles a fixed-rate loan for the housing cooperative. But there are two differences.

Perhaps the interest rate is not equal to the two products. If the interest rate swap rate is lower than the interest rate that can be obtained on a fixed-rate loan, then the interest rate swap will act as the best solution for the housing cooperative.

But since the other difference between the two loans is a disadvantage of the interest rate swap, this is not necessarily the case. The other difference between an interest rate swap and a fixed-rate loan is that interest rate swaps are not convertible, which most fixed-rate loans are.

When a fixed-rate loan is convertible, it actually means that, as a homeowner, you can score again if the interest rate falls or rises significantly. Since interest rate swaps are not convertible, the contract will be suspended with the bank until the expiry of the agreement.

If interest rates on an interest rate swap are significantly lower than on a corresponding fixed-rate loan, then it may make sense for a unit-linked association to draw an interest rate swap with the bank. This can be a cheaper solution for the housing cooperative than the fixed-rate loan.

However, as a housing cooperative, you must pay close attention to the two disadvantages of interest rate swaps in fixed-rate loans, as interest rate swaps are not convertible.

  • You can not redeem the loan before time
  • You can not take interest rate increases to lower the size of your loan and you can not take interest rate cuts to achieve a lower interest rate

 

Interest rate swap invest. Sale of condominium

Another aspect that is also interesting in the comparison between interest rate swaps and fixed-rate loans is the sale of unit apartments.

Since the interest rate swap is a fixed rate contract and a fixed maturity, this loan will have a major impact on the value of a cooperative. If a contract has been reached at 3%, after which the market interest rate rises to 7%, then it is a nice loan for a buyer, and then the opportunity can increase in value, just as if the mortgage company had taken a fixed rate loan.

Instead, if you have signed a contract to 7%, after which the market rate falls to 3%, then it is a very bad loan for a buyer. This means that the equity opportunity will fall sharply in value, as it depends on a very bad loan.

Instead, if it had been a convertible fixed-rate loan, you would be able to repay the loan and take a new one, which will not significantly affect the value of the apartment.

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