Mortgage loans can lower the risk in the assets
How can mortgages lower risk and perhaps give you a profit and a tax advantage if interest rates rise? You can read about this in this blog.
Low interest rates increase your risk
Interest rates have been very low in recent years. Although the US National Bank has raised interest rates recently, interest rates are still record low in both the US and Europe. This gives professional investors trouble in generating returns by buying bonds. The risk-free interest rate is so low that there are no alternatives to investing in equities. This also applies to you as a private investor.
You currently have significantly higher risk when you invest in a portfolio of shares and bonds than you had 10 years ago. Part of this risk is due to interest rate sensitivity on bonds, ie. that rates on fixed-rate bonds fall when interest rates rise. There is currently a significant price risk on fixed-rate bonds.
Lower interest rate risk and save tax
We have become accustomed to this risk for many years, and it seems that many investors close their eyes to it. But you can actually do something about it and at the same time possibly get a tax advantage.
If you have real estate, you can mortgage it with mortgage loans. If you choose fixed interest rates on your mortgage loans, you can reschedule them if interest rates rise (and typically also when they fall). The longer the maturity you have on your loans, the more price sensitive they are, and you can take advantage of that. For the interest rate rises, the price of the underlying bonds decreases and thus your residual debt on the loan. It allows you to make a profit by redeeming the loan ahead of time.
In some cases, this profit will even be tax free. Overall, your loans can give you a tax advantage because you can withdraw any losses and expenses while the profits are tax-free.
Most important, however, is that you use your real estate to lower the overall risk in your assets. Consider which parts of your wealth will lose value if interest rates rise. It is probably quite a few parts of your wealth that increase in value if interest rates rise.
Use your options?
There are no roses without thorns. In this context, keep an eye on the costs. In addition, it is crucial that you place the proceeds from the loans you take in something else long bonds.
Also, be aware that you slightly shift your finances. However, under normal circumstances this will be an acceptable trade off in relation to a decrease in interest rate sensitivity on the total assets.
Has this opportunity been sufficient? If you have floating-rate mortgages, you should consider switching to fixed-rate loans to secure your assets.