Swaps-and-traps Apr 2026

At its core, a swap is an agreement between two parties to exchange interest rate payments.

A swap is a long-term commitment. If interest rates fall significantly after you sign, the "value" of your swap becomes negative. If you need to sell your property or refinance your loan, the bank may demand a massive "breakage fee" to cancel the swap. This can effectively trap a borrower in a deal they no longer want. 2. Over-Hedging

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Stability doesn't have to be a gamble. To avoid the pitfalls of interest rate swaps, consider these steps:

The two floating rates cancel each other out, leaving the borrower with a predictable fixed-rate cost. The Traps Beneath the Surface At its core, a swap is an agreement

Negotiate "right to break" clauses or look into interest rate caps, which offer protection without the obligation of a swap.

If swaps are meant to reduce risk, why do they so often lead to financial distress? The "trap" usually comes down to three factors: 1. The Exit Cost (Breakage Fees) If you need to sell your property or

Never rely solely on the bank providing the swap for the valuation of that swap.