Mortgage Rates and Risk What is the general relationship between mortgage rates and long term
government security rates? Explain how mortgage lenders can be affect by interest rate
movements. Also explain how they can insulate against interest rate movements.
Solution
There is a direct correlation between mortgage rate and long term Govt security rates. When the
long term Govt security rate increases , the cost of fund generally increases, so the cost of money
for the motgage provider also increases. Therefore for fixed rate morgage lenders, higher rate on
long term Govt security indicates higher cost of borrowing but earning at the prevuis rate. It
causes loss for the morgage lender. The situation is reversed when long term Govt security rates
decrease and the cost of borrowing decreases.
Morgage lenders can insulate themselves against interest rate movements by offering Adjustable
rate mortgages where the morgage interest rate varies with benchmark Govt lending rate and any
positive or negative movement in Govt rates cause movement in mortgage rate in the same
direction..
Mortgage Rates and Risk What is the general relationship between mor.pdf
1. Mortgage Rates and Risk What is the general relationship between mortgage rates and long term
government security rates? Explain how mortgage lenders can be affect by interest rate
movements. Also explain how they can insulate against interest rate movements.
Solution
There is a direct correlation between mortgage rate and long term Govt security rates. When the
long term Govt security rate increases , the cost of fund generally increases, so the cost of money
for the motgage provider also increases. Therefore for fixed rate morgage lenders, higher rate on
long term Govt security indicates higher cost of borrowing but earning at the prevuis rate. It
causes loss for the morgage lender. The situation is reversed when long term Govt security rates
decrease and the cost of borrowing decreases.
Morgage lenders can insulate themselves against interest rate movements by offering Adjustable
rate mortgages where the morgage interest rate varies with benchmark Govt lending rate and any
positive or negative movement in Govt rates cause movement in mortgage rate in the same
direction.
