Amortising Base Rate Swap

[SimonMac]

Yes but why didn't they just offer a fixed rate loan?

It is the same isn't it.

What happened is the customer went in and said "I want a floating rate loan", then the bank wizz kids said they'd make more money if they sold a fixed rate loan so they said "sell her a floating rate tell her it's capped and we'll stick in a swap deal" bingo the bank sells a fixed rate loan to a customer who wants a floating rate.

If the customer had agreed a fixed rate loan they wouldn't be complaining, but then they probably wouldn't have agreed to the terms and shopped around for a cheaper rate. What they got sold was an expensive fixed rate loan because they didn't know it was one. There 's nothing special about a loan that doesn't go up because the interest rates do, that's why people enter into fixed rate loans.

By hiding the details of the contract meant that the bank could offer something at an apparent cheap price. It's like a second hand car salesman selling a car without the engine and then saying yaa boo sucks I never said there wasn't an engine in it.

Then who's fault is that the banks or the customers for not understanding what they are signing up to?!

[aussielong]

Yes but why didn't they just offer a fixed rate loan?

They probably wouldn't offer her a fixed rate loan. I could not get one for investment purposes for 300K. She was only 19.

Actually, she got into a floating rate loan and a collar, not a swap. They apparently did not tell her she would have to pay if the rate fell below 4.5%. And she did not know upfront that she could not get out of the trade without significant cost. That is bad if it's true. I find it hard to believe though. Maybe she thought she had limited risk on the rising rate (capped at 5.5) and would pay back the loan if rates indeed fell below 4.5, then taking out a new loan at a lower rate - but the T&Cs of the collar have burned her.