system two

system two
start-up thinking in the enterprise

Monday, 30 March 2009

hedging your mortgage....

Having mused about whether Gordon will allow the slow death of the pound, I now find myself thinking more practically about whether 25% interest rates are around the corner, and if they are - what I can do  to make sure I don't lose my house.....

There is an argument that everything we've seen so far - bank failures, retail sector woes and growing unemployment is all linear, expected, presumed. Many people (including it seems those increasing the mortgage stats last month by taking out fixed rates) are coming to realise that this isn't the end. That the country, punch drunk from the blows of the last 6 months, is blind to the fact that far from being at the bottom of a hole, we're simply teetering on a ledge of an even larger crater.

Around the corner might be non-linear, asymmetric chaos - the child of deep, visceral fear.

Imagine the scenario. In 3 months time after a continued stream of bad news with confidence and output declining faster than expected, the UK domestic stock market tumbles when the government fails to bail out a major retailer / manufacture (they've already refused to help a bank this week....)

Secondary industries stall, confidence collapses, consumption dies up to a trickle and the pound starts to slide. Public unrest increases, people start going genuinely hungry, international money gets scared, a 2nd bond auction fails, there's a run on the pound and the IMF steps in.

Interest rates go to 25%.

Is this likely? Is it plausible? Even if there’s only an outside chance of this happening, hedging makes a lot of sense given the downside risks. And to do so is weirdly easy.

HSBC is offering 3.99% for 5 years with £0 setup fee which you can hold for 90 days. If, like me, you've come out of a flexible deal some time ago, reapplying for a product such as this every 90 days could be the cleverest thing you ever do. In fact, everyone, regardless of whether they'd pay an early repayment penalty should do it. In all scenarios it surely makes more sense to take the hit than risk having to service a £250,000 mortgage at 25%. Monthly repayments of £5,500 anyone?

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