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Renteswap

An interest-rate swap, also called a rentebytteavtale, is an agreement between two parties to exchange interest terms on an agreed notional principal over a set period. One party pays a fixed rate and the other pays a floating rate to each other, so a borrower with a floating-rate bank loan can effectively lock in the interest cost without changing the loan itself. The purpose is predictable finance costs.

An interest-rate swap is an OTC derivative (over-the-counter), and the principal is not exchanged; only the difference between the floating and fixed rate is paid between the parties on set settlement dates. The floating rate is normally linked to a reference rate such as NOWA, or previously NIBOR. For players in næringseiendom (commercial property), an interest-rate swap is a key tool for securing a predictable interest cost on the loan portfolio, and it is often used together with floating-rate bank loans to lock in part of the exposure.

The market value moves with the interest-rate curve. When the market rate falls after the agreement is entered into, the fixed-rate payer gets a negative value on the swap, and the opposite happens when rates rise. On early settlement, this market value must be settled, and it can go either way. For accounting purposes, interest-rate swaps follow IFRS 9 and are measured at fair value through profit or loss, unless the company applies hedge accounting, where value changes are recognised in equity (OCI) until the hedged item affects profit or loss.

Finanstilsynet (the Financial Supervisory Authority of Norway) regulates the banks' derivative trading and has tightened margin requirements for non-cleared OTC derivatives under the EMIR rules in recent years. This is what separates an interest-rate swap from a fixed-rate loan, where the bank carries the interest-rate and refinancing risk and the borrower pays a price for it that is built into the interest margin. In an interest-rate swap, the borrower is itself a party to the derivative contract and has to deal with ongoing valuation, collateral and counterparty risk.

From Placepoint's glossary: Renteswap

More information: Store norske leksikon: swap, Norges Bank: NOWA, Finanstilsynet

English: Interest-rate swap.

Common questions we come across

What is an interest-rate swap?

An interest-rate swap is a financial agreement where two parties exchange interest terms. For example, a property player with a floating rate can switch to a fixed rate to secure predictable finance costs.

Who uses interest-rate swaps in the property industry?

Property investors and developers with large loans use interest-rate swaps to protect themselves against rate rises and to create predictability in cash flow, both in næringseiendom (commercial property) and in housing. The swap is normally entered into with a bank as the counterparty.

What is the market value of an interest-rate swap?

The market value of an interest-rate swap changes with the interest-rate level. If rates fall after the swap is entered into, the fixed-rate payer will have a negative market value on the swap, and the opposite applies when rates rise.

What are the advantages and disadvantages of an interest-rate swap?

An interest-rate swap gives predictability by locking in a fixed rate. The disadvantage is that you do not benefit from any fall in rates. In addition, early settlement of the swap can result in a gain or a loss.

Is an interest-rate swap the same as a fixed-rate loan?

An interest-rate swap is an OTC derivative agreement (over-the-counter) where two parties agree directly to exchange interest payments. It is not the same as a fixed-rate loan from the bank.