6 ms·

Somewhat completely off topic, but with interest rates "skyrocketing" compared to recent history, would it be feasible to "buy back" one's fixed rate debt? Or s

Somewhat completely off topic, but with interest rates "skyrocketing" compared to recent history, would it be feasible to "buy back" one's fixed rate debt? Or sensible?

rvnx 4y ago
You can do it with mortgage, go from fixed-rate to floating rate and vice-versa, and you pay the cost of hedging for the duration of the mortgage.
mghfreud 4y ago
Please ELI5.
- gopalv 4y ago
  So the reason SVB had trouble with their assets is that they had to reprice the mortgage based securities they had to sell off. If I wanted to buy back my house's mortgage from the bank, they'd ask me to pay the full principal. But if JP Morgan buys it off SVB, they'd discount the mortgage and pay either 80 cents to the dollar or 50 cents (!), while they get to collect the whole principal & interest back from me as I repay. What if I could buy it off SVB at fire sale prices, instead of some other financial firm? This is probably most relevant when you think of medical debt, for example John Oliver's medical debt give away where he bought 14.9 millon dollars in debt for 60k & just forgave it through a non-profit (because debt forgiveness is a taxable event, which is just a tax loophole otherwise). If you owe a hospital a million dollars and they are willing to sell it for 100k, why should you keep owing a million after its been sold for that price?
lamontcg 4y ago
You mean you want to pay off 90% of the remaining principle today in order to "buy" the paper at the same haircut that another bank would be able to buy it for? Nope.
- cowsandmilk 4y ago
  For companies with publicly traded debt, it is definitely possible. Whether it is advisable is a different question.
tsycho 4y ago
Interesting thought, treating your debt like a bond. If you no longer need the debt, i.e. you have the cash to pay it back, you could _theoretically_ loan out that cash to someone else at the higher current market interest rate. Loaning money involves credit risk of course, so practically this would mean buying something like higher interest paying Treasuries or AAA bonds. Effectively, the spread between your borrowed fixed rate debt and the bonds you bought are the _profit_ you make, the NetPresentValue of which is roughly what you would get if you could "buy back" the debt.
- piperswe 4y ago
  That's sorta what I'm doing with my car loan - instead of paying extra principal, I'm putting the money into an FDIC-insured account that pays about twice the interest that I'm paying on my car loan.
  - hnick 4y ago
    Do you pay tax on personal bank interest where you are? Here in Aus you'd be paying tax on the interest at your marginal rate, but if the car is personal that interest is not a tax deductible expense. So you will be ahead at twice the rate, but not by as much as you'd hope so you have to be careful if it's lower.
    - piperswe 4y ago
      I do pay tax on interest, but given the gap between the interest rates it's still a preferential situation (my marginal rate is only 22%)
deleted 4y ago
[deleted]
dragontamer 4y ago
When you have a 10% mortgage and interest rates drop to 2%, you refinance. You borrow a new loan at 2%, buy out your old 10% loan (so you never have to deal with 10% interest rate payments again). If you have a 2% loan, and interest rates skyrocket to 10%, you absolutely do not sell your 2% loan to reup to 10%. That's just stupid. You keep the 2% loan and even try to slow down payments (if you were double-paying or otherwise cutting down principal before, you stop doing that).
- kgwgk 4y ago
  I understand the question to be whether you can liquidate a 2% 20-year loan paying fifty cents on the dollar or whatever the fair amount is. (I guess the answer is no for the usual US mortgages but it could be yes for some kind of loans.)
  - mrfox321 4y ago
    I had a similar thought. It's equivalent to buying the bond that represents the debt you owe. Larger debt ends up in negotiations over the amount owed. War debt after WW1 resulted in greatly reduced repayments based on the original lending. If you are a default risk on debt that has weak collateral, you could probably come to some agreement that pays back some fraction of the principal.
  - dragontamer 4y ago
    The US Treasuries, like 10Y and 30Y, trade on the basis like you describe. All you gotta do is put a dollar value on it, which is actually relatively easy. Just calculate the approximate worth of 2033 dollars vs 2023 dollars, and adjust the prices today to match your expectations. There "is no risk" in US Treasuries because we're screwed if there are risks. (Aka, everyone ignores things like the Debt Ceiling debate).
    - kgwgk 4y ago
      Sure, but for many reasons (including taxes and other administrative issues) having two more-or-less-offsetting positions in completely different contexts is not the same as paying a debt.
jesperhh 4y ago
In Denmark this is possible and common. Danish mortgages can always be bought back at 100% value (if the rate drops), and for example a 2% mortgage from a few years ago can be bought back around 85% value.
- daydream 4y ago
  This is really interesting. Nothing like it exists in the US as far as I know. I am ignorant of current and previous Danish mortgage interest rates. Assuming a 2% mortgage from a few years back, and current interest rates at say 6%, I would expect to buy back at less than 85% value.

Somewhat completely off topic, but with interest rates "skyrocketing" compared to recent history, would it be feasible to "buy back" one's fixed rate debt? Or sensible?

rvnx 4y ago

You can do it with mortgage, go from fixed-rate to floating rate and vice-versa, and you pay the cost of hedging for the duration of the mortgage.

mghfreud 4y ago

Please ELI5.

gopalv 4y ago
So the reason SVB had trouble with their assets is that they had to reprice the mortgage based securities they had to sell off. If I wanted to buy back my house's mortgage from the bank, they'd ask me to pay the full principal. But if JP Morgan buys it off SVB, they'd discount the mortgage and pay either 80 cents to the dollar or 50 cents (!), while they get to collect the whole principal & interest back from me as I repay. What if I could buy it off SVB at fire sale prices, instead of some other financial firm? This is probably most relevant when you think of medical debt, for example John Oliver's medical debt give away where he bought 14.9 millon dollars in debt for 60k & just forgave it through a non-profit (because debt forgiveness is a taxable event, which is just a tax loophole otherwise). If you owe a hospital a million dollars and they are willing to sell it for 100k, why should you keep owing a million after its been sold for that price?

lamontcg 4y ago

You mean you want to pay off 90% of the remaining principle today in order to "buy" the paper at the same haircut that another bank would be able to buy it for? Nope.

cowsandmilk 4y ago
For companies with publicly traded debt, it is definitely possible. Whether it is advisable is a different question.

tsycho 4y ago

Interesting thought, treating your debt like a bond. If you no longer need the debt, i.e. you have the cash to pay it back, you could _theoretically_ loan out that cash to someone else at the higher current market interest rate. Loaning money involves credit risk of course, so practically this would mean buying something like higher interest paying Treasuries or AAA bonds. Effectively, the spread between your borrowed fixed rate debt and the bonds you bought are the _profit_ you make, the NetPresentValue of which is roughly what you would get if you could "buy back" the debt.

piperswe 4y ago
That's sorta what I'm doing with my car loan - instead of paying extra principal, I'm putting the money into an FDIC-insured account that pays about twice the interest that I'm paying on my car loan.
- hnick 4y ago
  Do you pay tax on personal bank interest where you are? Here in Aus you'd be paying tax on the interest at your marginal rate, but if the car is personal that interest is not a tax deductible expense. So you will be ahead at twice the rate, but not by as much as you'd hope so you have to be careful if it's lower.
  - piperswe 4y ago
    I do pay tax on interest, but given the gap between the interest rates it's still a preferential situation (my marginal rate is only 22%)

deleted 4y ago

[deleted]

dragontamer 4y ago

When you have a 10% mortgage and interest rates drop to 2%, you refinance. You borrow a new loan at 2%, buy out your old 10% loan (so you never have to deal with 10% interest rate payments again). If you have a 2% loan, and interest rates skyrocket to 10%, you absolutely do not sell your 2% loan to reup to 10%. That's just stupid. You keep the 2% loan and even try to slow down payments (if you were double-paying or otherwise cutting down principal before, you stop doing that).

kgwgk 4y ago
I understand the question to be whether you can liquidate a 2% 20-year loan paying fifty cents on the dollar or whatever the fair amount is. (I guess the answer is no for the usual US mortgages but it could be yes for some kind of loans.)
- mrfox321 4y ago
  I had a similar thought. It's equivalent to buying the bond that represents the debt you owe. Larger debt ends up in negotiations over the amount owed. War debt after WW1 resulted in greatly reduced repayments based on the original lending. If you are a default risk on debt that has weak collateral, you could probably come to some agreement that pays back some fraction of the principal.
- dragontamer 4y ago
  The US Treasuries, like 10Y and 30Y, trade on the basis like you describe. All you gotta do is put a dollar value on it, which is actually relatively easy. Just calculate the approximate worth of 2033 dollars vs 2023 dollars, and adjust the prices today to match your expectations. There "is no risk" in US Treasuries because we're screwed if there are risks. (Aka, everyone ignores things like the Debt Ceiling debate).
  - kgwgk 4y ago
    Sure, but for many reasons (including taxes and other administrative issues) having two more-or-less-offsetting positions in completely different contexts is not the same as paying a debt.

jesperhh 4y ago

In Denmark this is possible and common. Danish mortgages can always be bought back at 100% value (if the rate drops), and for example a 2% mortgage from a few years ago can be bought back around 85% value.

daydream 4y ago
This is really interesting. Nothing like it exists in the US as far as I know. I am ignorant of current and previous Danish mortgage interest rates. Assuming a 2% mortgage from a few years back, and current interest rates at say 6%, I would expect to buy back at less than 85% value.