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November 14, 2022

Insurance to protect against rising interest rates

The Background

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Everyone knew this was coming.

But what exactly can you do about it?

If you were ready to buy a house, you knew a year ago that you were getting a great deal on your mortgage.

But if you weren't ready, there wasn't much you could do. You just had to hope that you would be ready before the interest rates went up.

And if you waited too long, buying a house might now be out of reach.

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The Idea

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This week's idea is a service that allows someone to "lock in" the current interest rate for some amount of time.

Here's how it would work.

Let's say you think you want a house sometime in the next year. And you want to make sure the interest rate stays the same.

First, you go to a bank and get pre-approved for whatever amount of money you're going to need.

Then, you go to this company and say "Hey, here's my preapproval. I want to keep this same interest rate for the next year."

They verify and say "Sure, no problem!"

The company then goes out and gets a 31-year loan at the current interest rate.

It uses the pool of these loans to do some short-term lending for something like business inventory.

If you come back within 12 months and want the loan, they just act as a pass-through. They pay you, and you pay the company you borrowed from.

If they don't end up needing it, in 12 months you just pay it back.

The only cost to the company (besides overhead) is the difference between the interest rate they received from the money and the interest rate they paid for that year. Which could even be in their favor.

So for a negligible amount you can basically get interest rate insurance.