Rate cuts equal more volatility for investors: what's next?

The CBOE Volatility Index, or VIX (CBOE Volatility Index, or VIX, is an index created by CBOE Global Markets, which shows the market’s expectation of 30-day volatility) tends to spike in October during election years before selling off just before the event. This year, concerns about the U.S. economy and the pace of Federal Reserve interest rate cuts are more on investors’ minds.

The US election is looming, and Bank of America figures suggest that volatility tends to increase by 25% between July and November of a presidential election year.

So how does this volatility affect owner-occupiers? “For owner-occupied mortgages, fluctuations in interest rates can represent a significant challenge, affecting the cost of property acquisition and the long-term sustainability of operations. Below we’ll outline some ways in which changes in these rates can impact your real estate purchases, as well as proven strategies to help you confidently and flexibly navigate this landscape in the final quarter of the year.

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What areas may be affected by this volatility?

Fluctuating interest rates directly impact the affordability and viability of acquiring a property through homeowner mortgages. Changes in interest rates can lead to significant variations in borrowing costs, which could make property investments less accessible. In addition, rate changes can influence market sentiment, affecting property valuations and the investment climate.

Other aspects are that the Federal Reserve's policies play a fundamental role in monetary policy, including adjustments to the federal funds rate that have far-reaching implications for borrowing costs.

Effective interest rate management begins with an understanding of the factors driving interest rate dynamics. By utilizing advanced forecasting techniques, you can predict changes, adjust financing strategies proactively, and determine the optimal timing for your acquisitions.

Please keep in mind that interest rate volatility presents both risks and opportunities. Sudden increases in interest rates can raise borrowing costs and strain financial resources. However, they can also indicate economic growth and investment opportunities. On the other hand, extended periods of low interest rates can encourage acquisitions but they can also lead to price inflation and market speculation.

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Pros and Cons of floating rates

Floating-rate mortgages can adjust to changes in interest rates, offering flexibility. Unlike fixed-rate loans, they change periodically based on market rates. In a low-rate environment, borrowers can secure financing at decreased rates, reducing upfront costs and making it more affordable. Additionally, floating-rate mortgages may offer more flexibility for refinancing or restructuring debt as interest rates change.

To protect against rising interest rates, borrowers can use interest rate caps and collars. These risk management tools set upper limits on interest rate adjustments, protecting against sharp increases in borrowing costs.

Forward swaps and interest rate hedging strategies

For a better understanding, let's first define a forward swap. It's an agreement between two parties to exchange cash flows or assets on a fixed date in the future, and which also commences at some future date (specified in the swap agreement).

Forward swaps and other interest rate hedging techniques are essential for mitigating risk.

• Forward swaps involve the exchange of fixed and floating interest rate payments over a predetermined period, enabling borrowers to convert floating rate obligations into fixed rate liabilities. This strategy provides stability in interest rate payments, ensuring confident budgeting and planning.
• Experienced financial advisors and specialists play a crucial role in helping businesses design customized hedging strategies that align with their unique needs and circumstances. Through active management of interest rate risk, borrowers can significantly improve long-term financial performance.

Flexibility as a virtue of real estate financing

To position themselves for long-term success, companies must embrace flexible financing structures, leverage innovative funding models, and actively manage interest rate risk. Despite the challenges, interest rate volatility also offers opportunities for savvy investors.

To capitalize on favorable trends and unlock value in their real estate investments, owner-occupied mortgages must remain vigilant, stay informed, and adapt swiftly to changing market conditions. With strategic foresight, prudent risk management, and expert guidance, thriving amidst uncertainty and achieving real estate objectives is possible.

How we can help a foreign investor 

At H&CO, we can assist foreign investors by providing expert advisory services tailored to navigating complex international markets. With a deep understanding of tax, and regulatory environments, we help clients structure investments efficiently, ensuring compliance with local laws while optimizing tax strategies. 

We offer personalized solutions for everything from entity formation and mergers & acquisitions to wealth management and cross-border transactions, making the investment process smoother and more profitable for foreign investors entering new markets.

Contact us today for a consultation with our tax advisors.