Sep
27
Credit Rating Agencies - Need for Reform
Filed Under Home Loans | Comments Off
Nagraj Gummala
Credit Rating Agencies (CRAs) – Need for Reform
1. Crisis – Spotlight on CRAs
“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” - US Congressman Gary Ackerman
The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.
The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.
i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.
ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.
There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.
2. Credit Ratings and CRAs
i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.
ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.
Ratings can further be divided into
i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.
ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.
CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.
3. CRAs of note
Agencies that assign credit ratings for corporations include
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody’s (U.S.)
Standard & Poor’s (U.S.)
Pacific Credit Rating (Peru)
4. CRAs – Power and Influence
Various market participants that use and/or are affected by credit ratings are as follows
a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.
b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.
c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.
d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.
e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.
f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.
Rating downgrade – A Death spiral:
A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.
Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.
Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.
5. CRAs as victims
CRAs face the following challenges
a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.
b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.
c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.
d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.
6. CRAs as Perpetrators
a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.
Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.
b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.
All three of the above have the same capital allocation forcing banks to move towards riskier investments.
c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.
e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.
f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.
7. Some Recommendations
a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.
b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.
c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.
d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.
e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.
f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.
g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.
These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.
List of resources
i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm
ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php
iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove
iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html
v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece
vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance
vii) http://en.wikipedia.org/wiki/Credit_rating_agency
Credit Rating Agencies (CRAs) – Need for Reform
1. Crisis – Spotlight on CRAs
“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” - US Congressman Gary Ackerman
The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.
The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.
i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.
ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.
There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.
2. Credit Ratings and CRAs
i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.
ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.
Ratings can further be divided into
i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.
ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.
CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.
3. CRAs of note
Agencies that assign credit ratings for corporations include
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody’s (U.S.)
Standard & Poor’s (U.S.)
Pacific Credit Rating (Peru)
4. CRAs – Power and Influence
Various market participants that use and/or are affected by credit ratings are as follows
a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.
b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.
c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.
d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.
e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.
f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.
Rating downgrade – A Death spiral:
A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.
Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.
Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.
5. CRAs as victims
CRAs face the following challenges
a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.
b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.
c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.
d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.
6. CRAs as Perpetrators
a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.
Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.
b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.
All three of the above have the same capital allocation forcing banks to move towards riskier investments.
c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.
e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.
f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.
7. Some Recommendations
a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.
b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.
c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.
d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.
e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.
f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.
g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.
These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.
List of resources
i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm
ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php
iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove
iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html
v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece
vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance
vii) http://en.wikipedia.org/wiki/Credit_rating_agency
Sep
27
Interest Rate Risk Management – Hedging - Caps, Collars & Swaps
Filed Under Home Loans | Comments Off
Ben Randall
The topic of interest rate hedging is becoming increasingly more discussed in current market conditions. Many borrowers have found themselves with no option other than to remain on a Lenders Standard Variable Rate (SVR), due to criteria, limited lending options and loan to value (LTV) restrictions narrowing the refinancing market to an unwelcome low.
With Businesses, Professional Landlords and residential owners unable to adjust their borrowing exposure to a product or Lender to suit their business plan and attitude to risk, stand alone Interest Rate Management products such as Caps, Collars and Swaps become a suitable alternative.
What is Interest Rate Hedging?
In brief: Interest Rate Hedging is minimising and maximising your exposure to interest fluctuations by entering into a financial derivative. When considering your residential, business or portfolio mortgage debt, different strategies will need to be applied that protect your exposure within a defined period,
How can it apply to me?
Interest rate risk management products can be used by businesses or individuals. Banks normally apply certain restrictions to the availability of these products as they can be viewed as high risk and the area of ‘advice’ surrounding such products can be a regulatory nightmare.
Residential Mortgage Owner
In the same way that your mortgage Broker or Financial Adviser will discuss the available mortgage product options such as fixed or tracker rates, interest rate hedging products can use certain aspects of these choices to suit your budget and attitude to risk. You may have wished to take advantage of current low interest rates, but were fearful that should they rise your mortgage payments would increase beyond your budget. In such circumstances a stand alone ‘base rate cap’ could protect your payments at your chosen level, but you would still be able to take a tracker product of your choice to take advantage of low interest rates, for as long as they last….
Professional Landlords and Investors
With Bank Base Rate at its current low you are no doubt tempted to take advantage of the tracker rates around that provide pay rates as low as 3.5%. This might be great news now, but you are of course aware that when interest rates inevitably return to a more ‘normal’ level the margins applied to the current products will result in a much higher rate than. A current tracker rate of 3.5% applies a margin of 3% over Bank Base Rate. If BBR should increase to 5% which is by no means unlikely, the resulting 8% pay rate could certainly impact on the yield of your portfolio to a critical level.
In the current climate with money still coming at a price, the Fixed rate options are by no means attractive and it therefore leaves the decision making of managing your portfolio a tough one at present.
Businesses
If you have a large business loan, you will be able to apply quite simple maths to know at what point increasing interest rates will make your payments unsustainable and therefore threaten your business. Alternatively, you may also know that currently the payments on your business finance actually leave a level of positive cash flow that could be put to better use. Many Business owners will apply an interest rate cap to ensure their payments do not reach a critical level. The cost of such a policy can be offset by applying a collar so that if their payments reach a certain floor (low), a premium is reversely payable.
Can’t Refinance?
With reduced loan to value (LTV) products across the buy to let market, many investors have no options when it comes to remortgaging at present, as the current loan will exceed the maximum LTV limits on the products available. Short of reducing the loan or taking in some cases a product switch (if the Lender will allow), your borrowing remains in the hands of the prevailing interest rates, and therefore leaves an unwelcome level of uncertainty.
What can be done?
Interest Rate Management Products can alleviate the above issues by allowing you to effect a policy that suits your individual requirements, risk profile and affordability. With a large portfolio and the differing margins and variable rates spread across the products it can sometimes take detailed analysis to calculate at what point interest rates would make sustaining your portfolio critical.
Using the services of an Independent Analyst can assist you make an informed decision of when prevailing interest rates would impact your investment to a critical point. Alternatively, you may already understand the level of increase required in Bank Base Rate that would result in negative cash flow or unsustainable mortgage payments.
If you do decide to enter into a derivative, think carefully before you do so and understand the pitfalls as well as the benefits. The question of when is the ‘right time’ can never been answered, particularly in today’s uncertain global financial climate.
The topic of interest rate hedging is becoming increasingly more discussed in current market conditions. Many borrowers have found themselves with no option other than to remain on a Lenders Standard Variable Rate (SVR), due to criteria, limited lending options and loan to value (LTV) restrictions narrowing the refinancing market to an unwelcome low.
With Businesses, Professional Landlords and residential owners unable to adjust their borrowing exposure to a product or Lender to suit their business plan and attitude to risk, stand alone Interest Rate Management products such as Caps, Collars and Swaps become a suitable alternative.
What is Interest Rate Hedging?
In brief: Interest Rate Hedging is minimising and maximising your exposure to interest fluctuations by entering into a financial derivative. When considering your residential, business or portfolio mortgage debt, different strategies will need to be applied that protect your exposure within a defined period,
How can it apply to me?
Interest rate risk management products can be used by businesses or individuals. Banks normally apply certain restrictions to the availability of these products as they can be viewed as high risk and the area of ‘advice’ surrounding such products can be a regulatory nightmare.
Residential Mortgage Owner
In the same way that your mortgage Broker or Financial Adviser will discuss the available mortgage product options such as fixed or tracker rates, interest rate hedging products can use certain aspects of these choices to suit your budget and attitude to risk. You may have wished to take advantage of current low interest rates, but were fearful that should they rise your mortgage payments would increase beyond your budget. In such circumstances a stand alone ‘base rate cap’ could protect your payments at your chosen level, but you would still be able to take a tracker product of your choice to take advantage of low interest rates, for as long as they last….
Professional Landlords and Investors
With Bank Base Rate at its current low you are no doubt tempted to take advantage of the tracker rates around that provide pay rates as low as 3.5%. This might be great news now, but you are of course aware that when interest rates inevitably return to a more ‘normal’ level the margins applied to the current products will result in a much higher rate than. A current tracker rate of 3.5% applies a margin of 3% over Bank Base Rate. If BBR should increase to 5% which is by no means unlikely, the resulting 8% pay rate could certainly impact on the yield of your portfolio to a critical level.
In the current climate with money still coming at a price, the Fixed rate options are by no means attractive and it therefore leaves the decision making of managing your portfolio a tough one at present.
Businesses
If you have a large business loan, you will be able to apply quite simple maths to know at what point increasing interest rates will make your payments unsustainable and therefore threaten your business. Alternatively, you may also know that currently the payments on your business finance actually leave a level of positive cash flow that could be put to better use. Many Business owners will apply an interest rate cap to ensure their payments do not reach a critical level. The cost of such a policy can be offset by applying a collar so that if their payments reach a certain floor (low), a premium is reversely payable.
Can’t Refinance?
With reduced loan to value (LTV) products across the buy to let market, many investors have no options when it comes to remortgaging at present, as the current loan will exceed the maximum LTV limits on the products available. Short of reducing the loan or taking in some cases a product switch (if the Lender will allow), your borrowing remains in the hands of the prevailing interest rates, and therefore leaves an unwelcome level of uncertainty.
What can be done?
Interest Rate Management Products can alleviate the above issues by allowing you to effect a policy that suits your individual requirements, risk profile and affordability. With a large portfolio and the differing margins and variable rates spread across the products it can sometimes take detailed analysis to calculate at what point interest rates would make sustaining your portfolio critical.
Using the services of an Independent Analyst can assist you make an informed decision of when prevailing interest rates would impact your investment to a critical point. Alternatively, you may already understand the level of increase required in Bank Base Rate that would result in negative cash flow or unsustainable mortgage payments.
If you do decide to enter into a derivative, think carefully before you do so and understand the pitfalls as well as the benefits. The question of when is the ‘right time’ can never been answered, particularly in today’s uncertain global financial climate.
Sep
26
Secured Home Loans: Squeeze the Potential of your Home
Filed Under Home Loans | Comments Off
Steve c clark
If you want to avail personal loan for reasons like purchasing a new car, renovating your home, paying your debt etc. You can avail secured home loans by placing your home as collateral against the loan amount. Secured home loans are offered with very low rate of interest and can be availed by both good credit holders and bad credit holders.
DETAILS REGARDING SECURED HOME LOANS
With secured home loan can avail a loan to fulfill personal needs like purchasing a car, going for a vacation, paying previous debts etc. to avail a secured home loan you’ll have place your home as collateral against the loan amount. As secured home loans are secured in nature they carry low interest rate and flexible repayment options. It can also be availed by people having bad credit history due to reasons like arrears, defaults, CCJ’s etc. In case of secured home loans lenders ignore the bad credit score of borrower because they have the security in the form of the borrower’s home. With secured home loans one can avail an amount ranging from £5, 000 to £ 75, 000. Loan amount also depends upon the value of collateral and the credit history of the borrower. The repayment duration ranges from 10 – 25 years. Secured home loans can be applied for via Internet also.
WHY OPT FOR SECURED HOME LOANS
If you own a home you can avail secured home loans. You have to place your home as security against the loan amount to avail secured home loans. Secured home loans carry low interest rate, that’s why, can be easily repaid. Also the repayment duration is very flexible ranging from 10 – 25 years, due to this monthly installments are very small. With growing competition in the market one can avail secured home loans at favorable terms and conditions. You can also avail secured home loans via Internet. It takes only few clicks to apply for a through Internet.
SECURED HOME LOANS: SUGGESTIONS
You should always read all the terms and conditions of loan agreement to avoid any unpleasant situation in future. You can search Internet for lenders of secured home loans.
With few clicks you can get quotes from many lenders and then you compare them to opt for the best one that suits your needs or the one that offers you secured home loans at lowest interest rate. But once the loan gets approved make sure to pay all the monthly installments on due time because failing to do so you may lose your home. Also while applying for secured home loans always prefer well-known lenders with good reputation.
If you want to avail personal loan for reasons like purchasing a new car, renovating your home, paying your debt etc. You can avail secured home loans by placing your home as collateral against the loan amount. Secured home loans are offered with very low rate of interest and can be availed by both good credit holders and bad credit holders.
DETAILS REGARDING SECURED HOME LOANS
With secured home loan can avail a loan to fulfill personal needs like purchasing a car, going for a vacation, paying previous debts etc. to avail a secured home loan you’ll have place your home as collateral against the loan amount. As secured home loans are secured in nature they carry low interest rate and flexible repayment options. It can also be availed by people having bad credit history due to reasons like arrears, defaults, CCJ’s etc. In case of secured home loans lenders ignore the bad credit score of borrower because they have the security in the form of the borrower’s home. With secured home loans one can avail an amount ranging from £5, 000 to £ 75, 000. Loan amount also depends upon the value of collateral and the credit history of the borrower. The repayment duration ranges from 10 – 25 years. Secured home loans can be applied for via Internet also.
WHY OPT FOR SECURED HOME LOANS
If you own a home you can avail secured home loans. You have to place your home as security against the loan amount to avail secured home loans. Secured home loans carry low interest rate, that’s why, can be easily repaid. Also the repayment duration is very flexible ranging from 10 – 25 years, due to this monthly installments are very small. With growing competition in the market one can avail secured home loans at favorable terms and conditions. You can also avail secured home loans via Internet. It takes only few clicks to apply for a through Internet.
SECURED HOME LOANS: SUGGESTIONS
You should always read all the terms and conditions of loan agreement to avoid any unpleasant situation in future. You can search Internet for lenders of secured home loans.
With few clicks you can get quotes from many lenders and then you compare them to opt for the best one that suits your needs or the one that offers you secured home loans at lowest interest rate. But once the loan gets approved make sure to pay all the monthly installments on due time because failing to do so you may lose your home. Also while applying for secured home loans always prefer well-known lenders with good reputation.
Sep
18
Chess Rating Calculation In Fide (World Chess Federation)
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Bohdan Vovk
You may know the name of the famous chess player Garry Kasparov who hit the highest rating in the history of FIDE at 2849. You must also know that the FIDE rating is calculated by the Elo rating system. But do you know how?
The Elo Rating System
The Elo system is named after Dr. Arpad Elo who improved the original system developed by Kenneth Harkness. It has been in use in the USA since 1960 and was taken on by FIDE in 1970. The Elo system is twofold:
1. It shows how strong the player is: Player A rated 2400 is stronger than Player B rated 2300.
2. The system also calculates the results of a game, tournament, or chess event as numerical Elo results.
Originally designed as a chess rating system, nowadays it is also being used in a number of other sports and computer games.
The Main Elo Idea
Each chess player has chance to win a game. The stronger player, the more chances to win. FIDE uses a special winning probability table for a game which is based on the rating difference between the two opponents. If the rating difference between the two is 0, each player has equal chances to win, and his or her winning probability is 0.50. If the rating difference is 100, the stronger player has the winning probability 0.64 while the weaker 0.36. Please remember 100, 0.64, and 0.36.
Let’s imagine that Player A rated 2400 and Player B rated 2300 are to officially play 100 games. The rating difference being 100, the expected result for Player A is therefore 0.64 and for Player B 0.36. And now the main Elo idea follows… If Player A is really playing as strong as 2400 and Player B as 2300, at the end of the event Player A will score 64 and Player B 36 for sure. If Player A scores only 55 (but not expected 64) and Player B 45 (more than expected 36), the Elo system will change their new ratings.
The K-factor
The Elo rating system uses the K-factor which is necessary for Elo calculation. The K-factor is assigned to the chess player, and its possible values in FIDE are 10, 15, and 25 as follows:
* 25 for players new to the rating list, until they have completed events with a total of at least 30 games.
* 15 for players with a rating under 2400.
* 10 once the player has reached 2400 and been registered for at least 30 games. Thereafter it remains permanently at 10, even if the player’s rating is under 2400 at a later stage.
Calculating the Rating Change
The current rating of the chess player changes after each game. The one-game Rating Change depends on:
* The player’s K-factor.
* The player’s score (1, 0.5, or 0).
* The player’s Expected Result for a game.
Example 1. With the K-factor 10, Player A rated 2400 defeated Player B rated 2300. The Rating Change for Player A is therefore calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (1 - 0.64) = 10 x 0.36 = 3.6
Example 2. With the K-factor 10, Player A rated 2400 lost to Player B rated 2300. In this case, the Rating Change for Player A is calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x ( 0 - 0.64) = 10 x (- 0.64) = - 6.4
Example 3. With the K-factor 10, Player A rated 2400 made a draw with Player B rated 2300. The Rating Change for Player A is now calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (0.5 - 0.64) = 10 x (- 0.14) = - 1.4
Conclusion
The new rating of the chess player is calculated based on the rating change. Updated, the FIDE rating list is available online on 1 January, 1 April, 1 July, and 1 October… To learn more on the topic, you are welcome to Chess Rating and More.
You may know the name of the famous chess player Garry Kasparov who hit the highest rating in the history of FIDE at 2849. You must also know that the FIDE rating is calculated by the Elo rating system. But do you know how?
The Elo Rating System
The Elo system is named after Dr. Arpad Elo who improved the original system developed by Kenneth Harkness. It has been in use in the USA since 1960 and was taken on by FIDE in 1970. The Elo system is twofold:
1. It shows how strong the player is: Player A rated 2400 is stronger than Player B rated 2300.
2. The system also calculates the results of a game, tournament, or chess event as numerical Elo results.
Originally designed as a chess rating system, nowadays it is also being used in a number of other sports and computer games.
The Main Elo Idea
Each chess player has chance to win a game. The stronger player, the more chances to win. FIDE uses a special winning probability table for a game which is based on the rating difference between the two opponents. If the rating difference between the two is 0, each player has equal chances to win, and his or her winning probability is 0.50. If the rating difference is 100, the stronger player has the winning probability 0.64 while the weaker 0.36. Please remember 100, 0.64, and 0.36.
Let’s imagine that Player A rated 2400 and Player B rated 2300 are to officially play 100 games. The rating difference being 100, the expected result for Player A is therefore 0.64 and for Player B 0.36. And now the main Elo idea follows… If Player A is really playing as strong as 2400 and Player B as 2300, at the end of the event Player A will score 64 and Player B 36 for sure. If Player A scores only 55 (but not expected 64) and Player B 45 (more than expected 36), the Elo system will change their new ratings.
The K-factor
The Elo rating system uses the K-factor which is necessary for Elo calculation. The K-factor is assigned to the chess player, and its possible values in FIDE are 10, 15, and 25 as follows:
* 25 for players new to the rating list, until they have completed events with a total of at least 30 games.
* 15 for players with a rating under 2400.
* 10 once the player has reached 2400 and been registered for at least 30 games. Thereafter it remains permanently at 10, even if the player’s rating is under 2400 at a later stage.
Calculating the Rating Change
The current rating of the chess player changes after each game. The one-game Rating Change depends on:
* The player’s K-factor.
* The player’s score (1, 0.5, or 0).
* The player’s Expected Result for a game.
Example 1. With the K-factor 10, Player A rated 2400 defeated Player B rated 2300. The Rating Change for Player A is therefore calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (1 - 0.64) = 10 x 0.36 = 3.6
Example 2. With the K-factor 10, Player A rated 2400 lost to Player B rated 2300. In this case, the Rating Change for Player A is calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x ( 0 - 0.64) = 10 x (- 0.64) = - 6.4
Example 3. With the K-factor 10, Player A rated 2400 made a draw with Player B rated 2300. The Rating Change for Player A is now calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (0.5 - 0.64) = 10 x (- 0.14) = - 1.4
Conclusion
The new rating of the chess player is calculated based on the rating change. Updated, the FIDE rating list is available online on 1 January, 1 April, 1 July, and 1 October… To learn more on the topic, you are welcome to Chess Rating and More.
Sep
9
Is a Capped Rate Mortgage Right for You?
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Jerry Figueroa Lee
The first two considerations you have when arranging a mortgage are what type of mortgage rate is required along with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounted rates, capped, variable and tracker rates, along with the main advantages and disadvantages for each option.
When considering which type of mortgage product is suitable for your needs, it pays to consider your attitude to risk, as those with a cautious attitude to risk may find a fixed or capped rate more appropriate, whereas those with a more adventurous attitude to risk may find a tracker rate that fluctuates up and down more appealing.
Following is a description of the different mortgage rate options along with a summary of the main advantages and disadvantages for each option.
Fixed Rate Mortgages
With a fixed rate mortgage you can lock into a fixed repayment cost that will not fluctuate up or down with movements in the Bank of England base rate, or the lenders Standard Variable Rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates, but fixed rates of between 10 years and 30 years are now more common at reasonable rates. As a general rule of thumb, the longer the fixed rate period the higher the interest rate. This is also applicable when considering the percentage loan to value, where borrowing below 75% of the property value will attract a lower fixed rate in comparison to an 85% or 90% loan to value which will attract a higher fixed rate percentage.
Advantages
Having the peace of mind that your mortgage payment will not rise with increases in the base rate. This makes budgeting easier for the fixed rate period selected, and can be advantageous to first time buyers or those stretching themselves to the maximum affordable payment.
Disadvantages
The monthly repayment will remain the same even when the economic environment sees the Bank of England and lenders reducing their base rates. In these circumstances where the fixed rate ends up costing more, remembering why the initial decision was made to select a fixed rate, can be helpful.
Discount Rate Mortgages
With a discount rate mortgage, you are offered a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. The common mistake of those considering a discount rate, is to assume the higher the percentage discount offered, the better the deal. The key bit of information missing however, is what the lenders SVR is, as this will dictate the actual pay rate after the discount is applied.
As with a fixed rate, the longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount. In addition when considering the amount to be borrowed, the increased risk to the lender of providing a 90% loan will be reflected in the pay rate, with lower borrowing amounts attracting more competitive rates.
Advantages
Should the lender reduce their standard variable rate your interest rate and monthly payment will also reduce.
Disadvantages
When the lender or Bank of England increases their base rate, your mortgage payment will also increase. However in some circumstances lenders do not always pass on the full amount of a Bank of England base rate reduction.
Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should make certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period. Allowing for an increase in interest rates above the SVR would be prudent to avoid a ‘Payment shock’.
Tracker Rate Mortgages
Tracker rate mortgages guarantee to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate such at +0.5% over BOE base rate for 2 years.
The most popular tracker rate mortgages have been 2 and 3 year products, but there is now an increasing demand for lifetime tracker rates as borrowers are starting to realise that the Bank of England base rate has been reasonable competitive, and having a mortgage product linked to it could be beneficial in the long term.
Advantages
A tracker rate guarantees to follow the Bank of England base rate for however long the tracker rate is set up for. This means that as soon as the Bank of England cuts rates, a tracker rate mortgage guarantees to reflect the new lower rate and repayment.
The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging such as valuation fees, legal fee and lender arrangement fees. Lifetime tracker rates often have no early repayment penalty restrictions.
Disadvantages
The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are likely to be applicable during the benefit period, and as with other types of mortgage rate are likely to be 6 months interest or 3% - 5% of the loan.
Variable Rate Mortgages
Variable rate mortgages are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage. A variable rate is similar to a tracker rate in as much as the lender will base their SVR on the Bank of England base rate plus a loading of between say 2.5% and 3.5%. That is where the similarity ends however.
Advantages
The main advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. This provides a certain amount of flexibility when there is uncertainty in the market about where rates are moving. For those wishing to fix their mortgage rate, an SVR with no early repayment charge can provide the breathing space required to just wait and see before committing.
Whilst not always the case lenders do tend to pass on reductions in the Bank of England base rate through their SVR, and so those on the SVR will benefit from a reduction in the mortgage payment.
Disadvantages
Generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. In addition, as has been seen in the past, some lenders do not pass on any or all of a reduction in the Bank of England base rate which results in a higher monthly payment in comparison to other mortgage options.
Capped Rate Mortgages
The capped rate is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset. Capped rate mortgages offer the best of both worlds for those with a cautious attitude to risk, but who still wish to benefit from interest rate reductions. For example if the cap is set at 6% and the banks rates go below this rate, then your repayments will go down to reflect the reduction, with the guarantee that should rates go above the 6%, your payments will remain based on the maximum 6% because of the cap.
Advantages
If the Bank of England base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. For many this provides the peace of mind and certainty for ease of budgeting offered by a know maximum monthly payment.
Disadvantages
Because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate. This means that UK lenders generally don’t offer capped rate mortgages with any sort of competitive rate, preferring to market fixed rates instead.
The first two considerations you have when arranging a mortgage are what type of mortgage rate is required along with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounted rates, capped, variable and tracker rates, along with the main advantages and disadvantages for each option.
When considering which type of mortgage product is suitable for your needs, it pays to consider your attitude to risk, as those with a cautious attitude to risk may find a fixed or capped rate more appropriate, whereas those with a more adventurous attitude to risk may find a tracker rate that fluctuates up and down more appealing.
Following is a description of the different mortgage rate options along with a summary of the main advantages and disadvantages for each option.
Fixed Rate Mortgages
With a fixed rate mortgage you can lock into a fixed repayment cost that will not fluctuate up or down with movements in the Bank of England base rate, or the lenders Standard Variable Rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates, but fixed rates of between 10 years and 30 years are now more common at reasonable rates. As a general rule of thumb, the longer the fixed rate period the higher the interest rate. This is also applicable when considering the percentage loan to value, where borrowing below 75% of the property value will attract a lower fixed rate in comparison to an 85% or 90% loan to value which will attract a higher fixed rate percentage.
Advantages
Having the peace of mind that your mortgage payment will not rise with increases in the base rate. This makes budgeting easier for the fixed rate period selected, and can be advantageous to first time buyers or those stretching themselves to the maximum affordable payment.
Disadvantages
The monthly repayment will remain the same even when the economic environment sees the Bank of England and lenders reducing their base rates. In these circumstances where the fixed rate ends up costing more, remembering why the initial decision was made to select a fixed rate, can be helpful.
Discount Rate Mortgages
With a discount rate mortgage, you are offered a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. The common mistake of those considering a discount rate, is to assume the higher the percentage discount offered, the better the deal. The key bit of information missing however, is what the lenders SVR is, as this will dictate the actual pay rate after the discount is applied.
As with a fixed rate, the longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount. In addition when considering the amount to be borrowed, the increased risk to the lender of providing a 90% loan will be reflected in the pay rate, with lower borrowing amounts attracting more competitive rates.
Advantages
Should the lender reduce their standard variable rate your interest rate and monthly payment will also reduce.
Disadvantages
When the lender or Bank of England increases their base rate, your mortgage payment will also increase. However in some circumstances lenders do not always pass on the full amount of a Bank of England base rate reduction.
Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should make certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period. Allowing for an increase in interest rates above the SVR would be prudent to avoid a ‘Payment shock’.
Tracker Rate Mortgages
Tracker rate mortgages guarantee to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate such at +0.5% over BOE base rate for 2 years.
The most popular tracker rate mortgages have been 2 and 3 year products, but there is now an increasing demand for lifetime tracker rates as borrowers are starting to realise that the Bank of England base rate has been reasonable competitive, and having a mortgage product linked to it could be beneficial in the long term.
Advantages
A tracker rate guarantees to follow the Bank of England base rate for however long the tracker rate is set up for. This means that as soon as the Bank of England cuts rates, a tracker rate mortgage guarantees to reflect the new lower rate and repayment.
The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging such as valuation fees, legal fee and lender arrangement fees. Lifetime tracker rates often have no early repayment penalty restrictions.
Disadvantages
The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are likely to be applicable during the benefit period, and as with other types of mortgage rate are likely to be 6 months interest or 3% - 5% of the loan.
Variable Rate Mortgages
Variable rate mortgages are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage. A variable rate is similar to a tracker rate in as much as the lender will base their SVR on the Bank of England base rate plus a loading of between say 2.5% and 3.5%. That is where the similarity ends however.
Advantages
The main advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. This provides a certain amount of flexibility when there is uncertainty in the market about where rates are moving. For those wishing to fix their mortgage rate, an SVR with no early repayment charge can provide the breathing space required to just wait and see before committing.
Whilst not always the case lenders do tend to pass on reductions in the Bank of England base rate through their SVR, and so those on the SVR will benefit from a reduction in the mortgage payment.
Disadvantages
Generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. In addition, as has been seen in the past, some lenders do not pass on any or all of a reduction in the Bank of England base rate which results in a higher monthly payment in comparison to other mortgage options.
Capped Rate Mortgages
The capped rate is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset. Capped rate mortgages offer the best of both worlds for those with a cautious attitude to risk, but who still wish to benefit from interest rate reductions. For example if the cap is set at 6% and the banks rates go below this rate, then your repayments will go down to reflect the reduction, with the guarantee that should rates go above the 6%, your payments will remain based on the maximum 6% because of the cap.
Advantages
If the Bank of England base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. For many this provides the peace of mind and certainty for ease of budgeting offered by a know maximum monthly payment.
Disadvantages
Because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate. This means that UK lenders generally don’t offer capped rate mortgages with any sort of competitive rate, preferring to market fixed rates instead.
Sep
9
Arm Loan a Good Idea?
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Kristin Abouelata - Home Loans
When deciding upon a home mortgage, one of the most common options to consider other than a fixed rate loan is an ARM loan. ARM is an acronym for adjustable rate mortgage. With this product, a starting rate is fixed for a certain period of time, and then when that time is up, the rate can adjust depending upon a pre-determined index and margin. This period can be from anywhere of 1 month or 10 years, and can reflect principal and interest or sometimes interest only payments. The adjust results in the mortgage payment either increasing or decreasing. There is also a cap on how much the interest rate can go up or down.
Many people today are afraid of ARM loans and automatically only consider a fixed rate loan when applying for a mortgage. Depending on the market, this philosophy is sometimes the most economical route. But many times it may be worth your while to consider an ARM loan.
Within the past year or so, there wasn’t any real discernable advantage to considering an ARM over a fixed rate loan. The rates were comparable. But lately, the rates in general have crept up and, when comparing them, the ARM rates can have a healthy edge.
When I take a loan application, I ask my customer what their future plans are. Only going to be in town for a couple of years? Do you work for a company that relocates often? Do you plan to expand your family any time soon? Answering yes to any of these questions is a trigger for me to present an ARM loan as an option. The average homebuyer only stays in their home 7.5 years. I recently had a customer who knew she would be in town for only 3-4 years. The difference between a fixed rate and an ARM rate was .375%. The ARM rate was fixed for 5 years before any adjustment would occur. No brainer.
There are a myriad of mortgage products out there for the consumer to consider. Ask questions of your loan officer, and more importantly, expect your loan officer to ask questions of you. And if you can’t sleep at night because you know that one day that ARM loan can adjust, just remember one thing. You can always refinance your loan when that time comes. Now, get some sleep.
Kristin Abouelata mortgage website
When deciding upon a home mortgage, one of the most common options to consider other than a fixed rate loan is an ARM loan. ARM is an acronym for adjustable rate mortgage. With this product, a starting rate is fixed for a certain period of time, and then when that time is up, the rate can adjust depending upon a pre-determined index and margin. This period can be from anywhere of 1 month or 10 years, and can reflect principal and interest or sometimes interest only payments. The adjust results in the mortgage payment either increasing or decreasing. There is also a cap on how much the interest rate can go up or down.
Many people today are afraid of ARM loans and automatically only consider a fixed rate loan when applying for a mortgage. Depending on the market, this philosophy is sometimes the most economical route. But many times it may be worth your while to consider an ARM loan.
Within the past year or so, there wasn’t any real discernable advantage to considering an ARM over a fixed rate loan. The rates were comparable. But lately, the rates in general have crept up and, when comparing them, the ARM rates can have a healthy edge.
When I take a loan application, I ask my customer what their future plans are. Only going to be in town for a couple of years? Do you work for a company that relocates often? Do you plan to expand your family any time soon? Answering yes to any of these questions is a trigger for me to present an ARM loan as an option. The average homebuyer only stays in their home 7.5 years. I recently had a customer who knew she would be in town for only 3-4 years. The difference between a fixed rate and an ARM rate was .375%. The ARM rate was fixed for 5 years before any adjustment would occur. No brainer.
There are a myriad of mortgage products out there for the consumer to consider. Ask questions of your loan officer, and more importantly, expect your loan officer to ask questions of you. And if you can’t sleep at night because you know that one day that ARM loan can adjust, just remember one thing. You can always refinance your loan when that time comes. Now, get some sleep.
Kristin Abouelata mortgage website
Sep
8
Fulfil Your Dream of Owning a Home With the Home Loan
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Addi
Staying in own home is a dream of everyone. People see dreams of owning home at their own choice, but everybody doesn’t able to afford that. Nowadays in the country like India, money is not a barrier of the dream of owning a home. Because all the government and on-government banks in India offer Home loan. These loans are specially given to those people who wants to build-up their own home or purchase a home.
Indian banks offer home loan under different categories, these include:-
Home Purchase Loans – This kind of basic loans are being provided for purchasing a new home.
Home Construction Loan: Banks provides this kind of loan for construction of home.
Home Extension Loan: One can get the loan for expanding or extending his existing home.
Home Improvement Loans: People can avail these loans if they have the requirement for implementing repair works and renovations of their existing home.
Bridge Loans: This loan is the best loan for those people who wants to sell his existing home and wish to purchase a new home. Banks help people by giving this loan to finance the new home.
Balance Transfer Loans: This kind of loan is given to pay off an existing home loan and avail the option of a loan with a lower rate of interest.
Home Conversion Loan: Banks provide this kind of loan to those people who has already purchased home by taking home loan and then wants to move on to another home and for that he requires some extra money. Under this category of loan the existing loan is being transferred to the new home and the extra amount is to be included.
Land Purchase Loans: One can avail these loans for purchasing land. The bank will give the loan without checking whether the borrower taking the loan for construction his home or using it for some other purposes.
Refinance Loans: Those who have taken loans from their friends or relative to purchase their homes, this kind of loan helps them a lot to repay that debt amount to them.
Stamp Duty Loans: To purchase a property, stamp duty is essential. This kind of loan helps people to pay for the stamp duty.
In India, banks provide home loans against fixed and floating rate of interest. Under the fixed rate home loans the interest rate remains fixed for the whole period of the loan. By taking loan under this category the borrower will get the facility of getting a fixed interest rate. But in this case they have to pay a higher rate of interest. On the other hand, under the floating rate loans the rate of interest fluctuates accordingly. The borrower will get the facility of getting a low interest rate. But the interest rate can rise any time and the borrower has to pay a much higher interest rate than the fixed rate of these loans. The repayment of home loans are to be given through Equated Monthly Instalment (EMI). The home loan EMI depends on the amount and the repayment period one takes.
In this age of technology, one can apply for the home loan Online. By applying online one gets relief from the lots of hassle like visiting to the lenders, seeking for the best home loan deal, do the huge formalities and fulfil the long paper works. By availing these loans online one just has to sit on a Internet enabled computer, make a search for the best home loan deal and after choosing one just has to fill a form, that’s it. By doing some simple procedures you dreams can come true.
Staying in own home is a dream of everyone. People see dreams of owning home at their own choice, but everybody doesn’t able to afford that. Nowadays in the country like India, money is not a barrier of the dream of owning a home. Because all the government and on-government banks in India offer Home loan. These loans are specially given to those people who wants to build-up their own home or purchase a home.
Indian banks offer home loan under different categories, these include:-
Home Purchase Loans – This kind of basic loans are being provided for purchasing a new home.
Home Construction Loan: Banks provides this kind of loan for construction of home.
Home Extension Loan: One can get the loan for expanding or extending his existing home.
Home Improvement Loans: People can avail these loans if they have the requirement for implementing repair works and renovations of their existing home.
Bridge Loans: This loan is the best loan for those people who wants to sell his existing home and wish to purchase a new home. Banks help people by giving this loan to finance the new home.
Balance Transfer Loans: This kind of loan is given to pay off an existing home loan and avail the option of a loan with a lower rate of interest.
Home Conversion Loan: Banks provide this kind of loan to those people who has already purchased home by taking home loan and then wants to move on to another home and for that he requires some extra money. Under this category of loan the existing loan is being transferred to the new home and the extra amount is to be included.
Land Purchase Loans: One can avail these loans for purchasing land. The bank will give the loan without checking whether the borrower taking the loan for construction his home or using it for some other purposes.
Refinance Loans: Those who have taken loans from their friends or relative to purchase their homes, this kind of loan helps them a lot to repay that debt amount to them.
Stamp Duty Loans: To purchase a property, stamp duty is essential. This kind of loan helps people to pay for the stamp duty.
In India, banks provide home loans against fixed and floating rate of interest. Under the fixed rate home loans the interest rate remains fixed for the whole period of the loan. By taking loan under this category the borrower will get the facility of getting a fixed interest rate. But in this case they have to pay a higher rate of interest. On the other hand, under the floating rate loans the rate of interest fluctuates accordingly. The borrower will get the facility of getting a low interest rate. But the interest rate can rise any time and the borrower has to pay a much higher interest rate than the fixed rate of these loans. The repayment of home loans are to be given through Equated Monthly Instalment (EMI). The home loan EMI depends on the amount and the repayment period one takes.
In this age of technology, one can apply for the home loan Online. By applying online one gets relief from the lots of hassle like visiting to the lenders, seeking for the best home loan deal, do the huge formalities and fulfil the long paper works. By availing these loans online one just has to sit on a Internet enabled computer, make a search for the best home loan deal and after choosing one just has to fill a form, that’s it. By doing some simple procedures you dreams can come true.