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Interest rate swap doing your head?


TBLs - Does the Toxic Sausage method work?

Tailored Business Loans – The Product

Prior to 1970, virtually all mortgages were fixed rate – and break costs would have taken account of current interest rates at the time of breakage – so these products are not new. After 1970, variable rates became the norm, and most fixes were short term.

Research undertaken around 2005 indicated a lack of public desire for long term fixed rate mortgages.

The “Toxic Sausage” test , ie, measuring the client benefit,the client detriment, and the difference, can be carried out as easily on a TBL as it can on a swap – that is part one of the assessment.

Part two is examining how the product was sold, and what was said in the sale – for example, if the product (or, to be accurate, the change from a variable rate loan to a fixed rate loan) was described as “hedging”, was this an accurate description, or should the product have been more accurately be described as “exposure to greater risk?”

It is difficult to rationally criticise the product on its own, and outside the context of its sale. Although retail mortgage break costs may be expressed as a number of months’ payments, there is no reason for this to be automatically assumed for a business loan. There has been much invective on this point, but reasoned justification for it is always missing.

I have analysed the main types of mortgage available by the following categories:

UK Classic Fixed

UK Modern Fixed

US Fixed

UK Variable.

Copies of this analysis are available on request.

© Windsor Actuarial Consultants Limited

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