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I currently own a house with an ARM loan (with ~5 years left before it starts floating). I expect to move out in five years and would want to purchase another house and thus would be getting another mortgage (meanwhile prepaying the entire mortgage that I currently have). Chances are that the rates would be substantially higher by then. Is there anyway to lock in the historically low mortgage rate now and continue to finance the future property purchase?
Location: US
First consider the basic case of what you are asking: you expect to have a future obligation to pay interest, and you are concerned that the rate when you pay it, will be higher than the rate today. In the simplest case, you could theoretically hedge that risk by buying an asset which pays the market interest rate. As the interest rate rises, increasing your costs, your return on this asset would also increase. This would minimize your exposure to interest rate fluctuations.
There are of course two problems with this simplified solution:
(1) The reason you expect to pay interest, is because you need/want to take on debt to purchase your house. To fully offset this risk by putting all your money in an asset which bears the market interest rate, would effectively be the same as just buying your house in cash.
(2) The timing of the future outflow is a bit unique: you will be locking in a rate, in 5 years, which will determine the payments for the 5 years after that. So unless you own this interest-paying asset for that whole future duration, you won't immediately benefit. You also won't need / want to buy that asset today, because the rates from today to 2022 are largely irrelevant to you - you want something that directly goes against the prevailing mortgage interest rate in 2022 precisely.
So in your specific case, you could in theory consider the following solution: You could short a coupon bond, likely one with a 10 year maturity date from today. As interest rates rise, the value of the coupon bond [for it's remaining life of 5 years], which has an implied interest rate set today, will drop. Because you will have shorted an asset dropping in value, you will have a gain. You could then close your short position when you buy your house in 5 years. In theory, your gain at that moment in time, would equal the present value of the rate differential between today's low mortgage rates and tomorrow's high interest rates.
There are different ways mechanically to achieve what I mention above (such as buying forward derivative contracts based on interest rates, etc.), but all methods will have a few important caveats:
(1) These will not be perfect hedges against your mortgage rates, unless the product directly relates to mortgage rates. General interest rates will only be a proxy for mortgage rates.
(2) There is additional risk in taking this type of position. Taking a short position / trading on a margin requires you to make ongoing payments to the broker in the event that your position loses money. Theoretically those losses would be offset by inherent gains in the future, if mortgage rates stay low / go lower, but that offset isn't in your plan for 5 years.
(3) 5 years may be too long of a timeline for you to accurately time the maturity of your 'hedge' position. If you end up moving in 7 years, then changes in rates between 2022-2024 might mean you lose on both your 'hedge' position and your mortgage rates.
(4) Taking on a position like this will tie up your capital - either because you are directly buying an asset you believe will offset growing interest rates, or because you are taking on a margin account for a short position (preventing you from using a margin account for other investments, to the extent you 'max out' your margin limit).
I doubt any of these solutions will be desirable to an individual looking to mitigate interest rate risk, because of the additional risks it creates, but it may help you see this idea in another light.
You can't transfer mortgages when you purchase a new property. You can purchase a new property now, or you can refinance your current property now and leverage yourself as far as possible while rates are low.
The higher rates you are worried about may not be as bad as you think. With higher interest rates, that may put downward pressure on housing prices, or when rates do rise, it may simply move from historic lows to relative lows. I had a mortgage at 4.25% that I never bothered refinancing even though rates went much lower because the savings in interest paid (minus my tax deduction for mortgage interest) didn't amount to more than the cost of refinancing. If rates go back up to 5%, that will still be very affordable.
If interest rates have gone up, don't sell when you move. Refinance to lock in a low rate and rent out your current house when you move. Let the rent pay your new mortgage.
Outside of broadly hedging interest rate risk as I mentioned in my other answer, there may be a way that you could do what you are asking more directly:
You may be able to commit to purchasing a house/condo in a pre-construction phase, where your bank may be willing to lock in a mortgage for you at today's rates. The mortgage wouldn't actually be required until you take ownership from the builder, but the rates would be set in advance.
Some caveats for this approach:
(1) You would need to know the house/condo you want to move into in advance, and you would be committing to that move today.
(2) The bank may not be willing to commit to rates that far in advance.
(3) Construction would likely take far less than 5 years, unless you are buying a condo (which is the reason I mention condos specifically).
(4) You are also committing to the price you are paying for your property. This hedges you somewhat against price fluctuation in your future area, but because you currently own property, you are already somewhat hedged against property price fluctuation, meaning this is taking on additional risk.
The 'savings' associated with this plan as they relate to your original question (which are really just hedging against interest rate fluctuations) are far outweighed by the external pros and cons associated with buying property in advance like this. By that I mean - if it was something else you were already considering, this might be a (small) tick in the "Pro" column, but otherwise is far too committal / complex to be considered for interest rate hedging on its own.
You could consider turning your current place into a Rental Property.
This is more easily done with a fixed rate loan, and you said you have an ARM.
The way it would work:
If you can charge enough rent to cover your current mortgage plus the interest-difference on your new mortgage, then the income from your rental property can effectively lower the interest rate on your new home.
By keeping your current low rate, month-after-month, you'll pay the market rate on your new home, but you'll also receive rental income from your previous home to offset the increased cost.
Granted, a lot of your value will be locked up in equity in your former home, and not be easily accessible (except through a HELOC or similar), but if you can afford it, it is a good possibility.
