There are many different types on the market today mortgage programs. Each of them has a number of parameters, such as: loan amount, term, interest rate, the amount of the down payment, the conditions for early repayment, the amount of the commission for issuing a loan, etc. The total number of such parameters can be more than fifty. However, not all of them have the same meaning. It is not always easy for a borrower to figure out which loan program to choose: with a "fixed" or "floating" interest rate. The answer to the question, what are their differences, and will try to give the specialists of the mortgage company "UNICOM".
Fixed interest rate- This is a system of interest accrual, when during the entire period of lending, loan payments are calculated based on the same percentage for using the loan amount.
floating interest rate is a system of accrual of interest, which is "tied" to some market indicator.
To issue loans for Russian market two indices are most commonly used: LIBOR (London Interbank Offered Rate, or London Interbank Offered Rate) for loans in foreign currency and MosPrime (MosPrime Rate - Moscow Prime Offered Rate) - for rubles.
A significant proportion of mortgage loans in the West is issued with a floating rate. Credit institutions, fearing the bankruptcy of their clients with a sharp increase in market indices, independently set a line above which they will not raise rates under any circumstances.
floating interest rate mortgage loan usually consists of two parts: a fixed interest rate (base interest) and some kind of floating index, which, when these two values are added, will make the final interest rate floating. If the index goes up, then the total interest will increase, and the borrower will have to pay more on such a mortgage loan. If the index value decreases, the borrower can save on payments.
What is LIBOR?
LIBOR is a globally recognized indicator of the value of financial resources. At this rate, the largest banks in the world are ready to issue loans to other major banks on the London Interbank Stock Exchange. The abbreviation LIBOR stands for London InterBank Offer Rate (London Interbank Offer Rate).
The LIBOR rate is the most widely used measure of short-term interest rates worldwide. LIBOR is formed on the basis of interest rates of several leading world banks. The banks included in the LIBOR calculation base provide their quotes between 11.00 and 11.30 London time. Around 12.00, the so-called "fixing" is published - the value is fixed. LIBOR is calculated in seven major currencies: US dollar, euro, British pound, Japanese yen, Swiss franc, Canadian dollar and Australian dollar.
What is MosPrime?
MosPrime (Moscow Prime Offered Rate) is the indicative rate for providing ruble loans (deposits) on the Moscow market. This rate is formed by the National Currency Association (NVA) based on the placement rates of ruble loans (deposits) declared by the leading participants of the Russian money market as first-class financial institutions.
The rates announced by banks to form the indicative MosPrime Rate are purely indicative information, while the announced rates should reflect the level of interest rates at which participating banks will be ready to provide loans in accordance with the legislation of the Russian Federation to first-class financial institutions at the time of the announcement of quotations. institutions operating on the Moscow money market. Banks announce rates at which they could place funds on the interbank market at 11.45 Moscow time. At 12.30 a "fixing" is published - a fixed value of the rate for a specific day. MosPrime is calculated for overnight terms, 1 week. 2 weeks, 1, 2, 3 and 6 months. These periods have corresponding designations - MosPrimeON, MosPrime1w, MosPrime2w, MosPrime1m, MosPrime2m, MosPrime3m, MosPrime6m, respectively.
How does the "floating" interest rate change?
The LIBOR rate can be fixed for various periods from several days to 12 months. IN mortgage lending LIBOR 6 months (LIBOR 6m) is often used. Usually, when lending with a floating rate, the change in interest occurs 2 times a year, i.e. every 6 months, the floating part changes, depending on the value of a certain market indicator. Other options are also possible, for example, every 3 or 12 months the index can be revised. Frequent changes in interest rates are not convenient for the borrowers themselves, so credit organizations They try to stick to the period of 6 months. In each new period, the borrower will repay the loan taking into account the new value of the index.
How does the "fixed" interest rate change?
The fixed interest rate can only be changed in accordance with the terms of the loan agreement or by agreement of the parties. Russian legislation does not provide for other grounds for changing the interest rate. Therefore, if loan agreement unless otherwise provided, the interest rate can only be changed upon signing by the borrower of an additional document that changes the terms of the loan agreement.
Advantages and disadvantages
"Floating" rate makes it possible to get a loan with a lower interest rate compared to the current price situation in the loan market or "catch" a downtrend in the market borrowed money. However, the borrower should not forget that a loan with a "floating" rate carries a serious interest rate risk for him, which may result in an increase in interest rates for him following a change in the market situation.
* data for 2008 on the graph are shown as of 05/09/2008.
If you look at the changes in the LIBOR index since 1986, it will be clear that LIBOR values can range from 9.63 (1988) to 1.45 (2002).
In a situation where the floating index goes up, it would be most reasonable for the borrower to either repay the loan ahead of schedule or refinance (refinance) on other terms. As a result of refinancing, the borrower can get a fixed rate loan and thus get away from a dangerous market situation. When receiving a loan with a "floating" rate, special attention should be paid to penalties for early repayment of the loan, since these sanctions may arise when it is necessary to refinance, urgent full or partial repayment of the loan.
Speaking about the "floating" rate, it should be noted that loans with a "floating" interest rate are not in great demand in our country, because it is more convenient and understandable for most of our borrowers to repay the loan every month in fixed amounts. Loans with a fixed interest rate allow the borrower to plan his expenses, to know that every month he must set aside a certain amount from his salary. This is the reason for the high popularity of loans with a fixed interest rate in our country.
This is the reason that not every borrower wants to constantly monitor changes in rates and worry about how this may affect the loan. Therefore, floating interest rates are mainly used by financially savvy people who are not afraid of a possible rate increase and who know how to benefit from this product.
In general, we can say that the choice of the type of interest rate is one of the main steps in a mortgage transaction.
Rubric “Enterprise Economics. Management strategy and tactics »
ON THE. Rabets, economist
Considering the possibility of obtaining a loan from a bank, the borrower evaluates the options for borrowing conditions from the standpoint of their profitability. At the same time, no less important than the amount of the loan and the loan term is the value of the interest rate, on which the amount of additional monthly payments to the bank depends.
According to the current legislation, payment is one of the main conditions for lending, so the interest rate must be indicated in the loan agreement.
Banks offer business entities various conditions and financing schemes. Some of the proposed conditions depend on the type of activity of the future borrower, its indicators. There are many offers on the banking market, so it is quite difficult to assess which type of borrowing is more profitable to choose. With short-term lending, it is easier to navigate. With a long loan term, a more thorough study of its fundamental conditions, including those related to cost, is required.
Price loan products depends on the cost of the resource base and risk assessment, taking into account possible negative consequences. For a bank client, it is also important to take into account the prospects for cooperation with the bank and the expected change in the cost of resources in the interbank market, since it will entail a change in the cost of borrowing.
FIXED INTEREST RATE
It is unrealistic to take into account all possible options for changing the economic situation, and therefore it is difficult to minimize losses from the use of credit funds, especially with long-term lending.
Thus, it is at the stage of coordination that it is necessary to calculate which cost conditions should be given preference. If the loan is long-term, then it is better to choose a fixed interest rate..
According to Art. 145 of the Banking Code of the Republic of Belarus (hereinafter - BC), the amount of a fixed annual interest rate is provided for in the loan agreement upon its conclusion and is constant during the term of the loan agreement. The size of the variable annual interest rate changes in the manner agreed by the parties when concluding the loan agreement, and cannot be changed unilaterally.
Based on the provisions of Art. 145 BC, then the fixed rate must remain constant throughout the entire period of use of credit resources under the concluded loan agreement. At the same time, the legislation does not prohibit changing it by agreement of the parties, therefore, the fixed interest rate may also change (for example, due to a deterioration in the economic situation or financial indicators of the borrower, an increase in the cost of resources).
A change in the fixed interest rate is formalized by an additional agreement to the loan agreement. According to Art. 420 of the Civil Code of the Republic of Belarus (hereinafter - the Civil Code), amendment and termination of the contract is possible by agreement of the parties, unless otherwise provided by the Civil Code and other legislative acts or the contract.
At the request of one of the parties, the contract can be changed or terminated by a court decision. only:
- in the event of a material breach of the contract by the other party;
- in other cases provided for by the Civil Code and other legislative acts or the contract.
Violation of the contract by one of the parties is recognized as essential if it entails such damage for the other party, as a result of which it is largely deprived of what it was entitled to count on when concluding the contract.
It should be noted that the loan agreement in most cases provides for the possibility of increasing the interest rate during the period of using the loan. Banks, as a rule, even determine the maximum amount of increase in the fixed interest rate under certain circumstances (for example, a change in the refinancing rate).
If the bank considers that the circumstances listed in the loan agreement already exist, a letter is sent to the client with a proposal to conclude an additional agreement on changing the interest rate. The client may agree to this, refuse or ignore the offer, which is also regarded as a negative response, unless the loan agreement provides otherwise.
If the parties have not reached an agreement on bringing the contract in line with the significantly changed circumstances or its termination, the contract may be terminated in accordance with Art. 421 GK. A significant change in the circumstances from which the parties proceeded when concluding the contract is the basis for its change or termination, unless otherwise provided by the contract or follows from its essence.
Also, the bank may offer an increase in the fixed interest rate due to late repayment of the debt by the client, due to the deterioration of his financial condition. Such an increase in the interest rate is usually provided for by the terms of the loan agreement, so it is not necessary to conclude an additional agreement. It is necessarily concluded only if the loan agreement does not contain a condition for the payment of interest in an increased amount if the loan is not repaid on time.
In accordance with Art. 145 BK, the borrower who has not returned (did not repay) the loan on time is obliged, from the next day after the expiration of the loan repayment (repayment) period until its full return (repayment), to pay interest for using the loan in an increased amount specified in the loan agreement, if other size is not provided by the legislation of the Republic of Belarus.
If the loan has not yet matured, but there are signs of a deterioration in the financial condition of the borrower, the bank may initiate an increase in the cost of the loan, but this issue is resolved only by agreement between the parties.
Banks have ways of influencing customers who do not agree to an increase in the interest rate on a loan. For example, a bank may refuse to further provide a loan to a client. The possibility of a unilateral refusal of the bank to further fulfill its obligations should follow either from the terms of the loan agreement or the norms of the law. The provisions of Art. 141 BC give the bank the right to refuse to fulfill its obligations under the loan agreement in the event that the borrower fails to fulfill its obligations under this agreement.
In addition, the bank may require early repayment of the loan in accordance with the terms of the loan agreement. The bank's right to early recovery of a loan in case of non-fulfillment or improper fulfillment by the borrower of obligations under the loan agreement is provided for by Art. 143 BC. The legislation does not specify what obligations are meant, therefore they are determined at the discretion of the lender. These obligations may include the signing by the client of an additional agreement to increase the interest rate.
Therefore, if no response is received from the client after the expiration of the period established for concluding an additional agreement on changing the terms of the loan agreement in terms of the loan fee, the lender may demand its early return, if the corresponding condition is provided for by the loan agreement. Upon receipt of such a request, the client must repay the loan within the period specified by the bank. The loan agreement establishes the period of early repayment of the loan. According to the Instruction on the procedure for providing (placement) by banks of funds in the form of a loan and their return, approved by the Resolution of the Board of the National Bank of the Republic of Belarus dated December 30, 2003 No. 226 (as amended on September 4, 2015; hereinafter - Instruction No. 226), the period within during which the borrower individual or a small business entity is obliged, if provided for by the loan agreement, to return (repay) the loan ahead of schedule in case of non-fulfillment by it of the terms of the loan agreement on the conclusion of an additional agreement to it on increasing the amount of interest for using the loan, must be at least three months from the date of presentation by the bank - the lender demands for early repayment (repayment) of the loan.
In accordance with the Law of the Republic of Belarus dated July 1, 2010 No. 148-З “On Support for Small and Medium-Sized Businesses” (as amended on December 30, 2015) to small businesses relate:
- individual entrepreneurs registered in the Republic of Belarus;
- microorganizations are commercial organizations registered in the Republic of Belarus with an average number of employees per calendar year of up to 15 people. inclusive;
- small organizations - commercial organizations registered in the Republic of Belarus with an average number of employees per calendar year from 16 to 100 people. inclusive.
Thus, if the client of the bank does not agree to an increase in the interest rate, he has the right to repay the loan ahead of schedule within the period established by the loan agreement or to refinance in another bank on conditions acceptable to him. If he does not have the opportunity to get a loan from another bank and does not have enough own funds to repay the loan, then the client can only agree to the option offered by the bank and sign an additional agreement to increase the interest rate.
VARIABLE RATE
To avoid problems associated with negotiating with the bank a possible increase in the interest rate, you can conclude an agreement providing for a variable interest rate on the loan. It cannot be an absolute value and is determined with reference to the refinancing rate or the overnight rate.
According to Art. 31 BC refinancing rate— is the rate of the National Bank of the Republic of Belarus, which is the basic tool for regulating the level of interest rates in the money market and serving as the basis for setting interest rates for operations providing liquidity to banks.
For example, the loan agreement specifies an interest rate equal to the refinancing rate plus two percentage points. The variable component of this interest rate is the refinancing rate, and the constant component is two percentage points. If the bank wants to increase the constant component to five percentage points, this will require the consent of the borrower and the conclusion of an additional agreement to the loan agreement.
The rate on standing operations of the National Bank of the Republic of Belarus in the form of an overnight loan is currently 23%. Loan interest is determined as a percentage of this rate. Each bank and each client has its own terms and conditions. In one bank, the interest rate on a loan may be 90% of the overnight rate, in another - 95%, etc.
Sometimes, in practice, LIBOR or EURIBOR is used as the base rate, which increases or decreases by a certain number of percentage points at the discretion of the bank. BidLIBOR- is the weighted average interest rate on interbank loans provided by banks acting on the London interbank market with offers of funds in different currencies (see chart) and for various periods (from one day to one year). The rate is chosen for a period equal to the lending period. Bid EURIBOR is the average interest rate on interbank loans provided in euros.
Most often, LIBOR and EURIBOR rates are used as base rates for lending at the expense of foreign banks' resources. This is done to minimize losses and protect against sharp changes in rates on world markets. Mostly, such rates are used when obtaining a loan through post-financing, which requires the involvement of foreign bank resources.
Until 2016, export credits were actively issued to resident exporters in foreign currency, except for Russian rubles, in accordance with the Decree of the President of the Republic of Belarus of August 25, 2006 No. 534 "On promoting the development of exports of goods (works, services)" (as amended on June 21, 2016) with the payment of interest at the rate of CIRRs, which is commercially oriented interest rate in accordance with the provisions of the Agreement on Officially Supported Export Credits, developed by member countries of the Organization for Economic Cooperation and Development.
Currently, export credits are issued only to non-residents. Only one bank is authorized to issue them - OJSC Development Bank of the Republic of Belarus. However, this is also important for the country's exporters, since they can initiate the receipt of export credits by their business partners and thereby ensure the promptness of settlements.
REPAYMENT OF THE LOAN AND INTEREST ON IT
Regardless of the cost terms of lending and the type of interest rate, repayment of interest on the loan, as a rule, is made monthly. So, according to Art. 137 BC under a loan agreement, a bank or a non-bank financial institution (lender) undertakes to provide funds (credit) to another person (borrower) in the amount and on the terms specified in the agreement, and the borrower undertakes to repay (repay) the loan and pay interest for using it . At the same time, the collection by the lender of any additional payments(commissions and others) for the use of the loan is not allowed.
In accordance with Art. 145 BK, the lender, when concluding a loan agreement with the borrower, independently determines the amount, frequency of accrual and terms for paying interest for using the loan.
The parties have the right to provide in the loan agreement the procedure in which the interest for the use of the loan is paid in full on the day of return (repayment) of the loan or in equal installments during the period of its return (repayment), unless otherwise provided by the President of the Republic of Belarus or in the prescribed manner by the Government of the Republic of Belarus.
In accordance with Instruction No. 226, repayment (repayment) of a loan, payment of interest for using it are made both in a non-cash form to the account of the lender, and in cash in cash to the lender's cash desk in accordance with the loan agreement and the legislation of the Republic of Belarus.
Individual entrepreneurs engaged in entrepreneurial activities without opening current (settlement) bank accounts can repay a loan, pay interest for using it in cash by depositing it into the lender's cash desk without limiting the size of the payment.
REPAYMENT OF DEBT TO THE BANK
Sometimes a bank client cannot timely pay interest on a loan. If he has no other obligations to the bank that are not fulfilled on time, he must pay interest as soon as he has money. If the client also has other types of debt to the bank, he repays them in the order provided for in Art. 145 BC. According to this article, if there are insufficient funds to fully fulfill obligations under a loan agreement, the borrower first of all repays the bank's costs for fulfilling the obligation, secondly, the principal amount of the loan, then the interest due for using it, thirdly, fulfills other obligations arising from loan agreement, unless otherwise provided by the President of the Republic of Belarus.
The loan agreement may provide for the responsibility of the borrower for late payment of interest for the use of the loan.
To date, there are two types of interest rates in the lending market:
- Fixed interest rate;
- floating interest rate.
Fixed interest rate
A fixed interest rate is a system of accruing interest in which, over the entire term of the loan, loan payments are calculated based on the same percentage for using the loan amount. And, unless otherwise provided in the loan agreement, the rate can be changed only when the borrower signs an additional document.
floating interest rate
As for the second type of bets, everything is much more complicated here. A floating interest rate is a system of accruing interest that is "tied" to a specific market indicator. It consists of two parts - a fixed rate and a floating index. In the Russian Federation, two indices are most often used: LIBOR for foreign currency loans and MosPrime for loans in rubles.
What interest rates are best?
Loans with floating interest rates are not very popular in our country. This suggests that borrowers are unwilling or unable to monitor situations on financial market. Most borrowers prefer to allocate fixed amounts from the budget on a monthly basis, it is more convenient and understandable.
Effective interest rate
The effective interest rate on a loan is the total amount of all payments for the use of the bank's loan funds, distributed over the entire period of the loan agreement. It is determined by calculation and consists of:
- the nominal rate % specified in the contract;
- associated costs for obtaining a loan;
- payments and commissions for servicing the loan.
When applying for a mortgage loan, some banks offer borrowers two types of interest rates, namely fixed and floating interest rates. They were invented by banks to diversify the offer of products for borrowers and give them the opportunity to choose the most interesting option. And, as practice shows, each finds its application.
Fixed interest rate- this is a system of accruing interest, when during the entire period of lending, loan payments are calculated based on the same percentage for using the loan amount.
floating interest rate- this is a system of interest calculation, which is "tied" to some market indicator. The size of the floating interest rate consists of two parts - the base part and the floating index, which affects the increase or decrease in the rate. Most borrowers are afraid to take a loan with a floating interest rate, because they are afraid of a sharp increase in the index that affects the interest rate, however, almost all banks are ready to support the interests of their customers and, in the event of a significant increase in the index, set the maximum interest rate, above which it cannot rise .
For issuing loans in the Russian market, two indices are most often used: LIBOR (London Interbank Offered Rate, or London Interbank Offered Rate) for loans in foreign currency and MosPrime (MosPrime Rate - Moscow Prime Offered Rate) - for rubles.
LIBOR is a globally recognized indicator of the value of financial resources. At this rate, the largest banks in the world are ready to issue loans to other major banks on the London Interbank Stock Exchange. The abbreviation LIBOR stands for London InterBank Offer Rate (London Interbank Offer Rate).
MosPrime(Moscow Prime Offered Rate) - an indicative rate for the provision of ruble loans (deposits) in the Moscow market. This rate is formed by the National Monetary Association (NVA) on the basis of the placement rates of ruble loans (deposits) announced by the leading participants of the Russian money market to first-class financial institutions. The rates announced by banks to form the indicative MosPrime Rate are purely indicative information, while the announced rates should reflect the level of interest rates at which participating banks will be ready to provide loans in accordance with the legislation of the Russian Federation to first-class financial institutions at the time of the announcement of quotations. institutions operating on the Moscow money market.
How does the "floating" interest rate change?
The LIBOR rate can be fixed for various periods from several days to 12 months. In mortgage lending LIBOR 6 months (LIBOR 6m) is often used. Usually, when lending with a floating rate, the change in interest occurs 2 times a year, i.e. every 6 months, the floating part changes, depending on the value of a certain market indicator. There are other options, for example, every 3 or 12 months the index can be revised. Frequent changes in the interest rate are not convenient for the recipients of loans, so credit organizations try to stick to a period of 6 months. In each new period, the borrower will repay the loan taking into account the new value of the index.
How does the "fixed" interest rate change?
The fixed interest rate can only be changed in accordance with the terms of the loan agreement or by agreement of the parties. Russian legislation does not provide for other grounds for changing the interest rate. Therefore, unless otherwise provided by the loan agreement, the interest rate can be changed only when the borrower signs an additional document that changes the terms of the loan agreement.
The main advantage of a fixed interest rate is stability, in which the borrower always knows how much he must pay and does not need to regularly conclude additional agreements with the bank, however, when obtaining a loan with a floating interest rate, there is always a chance to save a little, because even 0.5- 1% difference can result in very noticeable for family budget amounts. In the event of a noticeable increase in the floating interest rate, as a last resort, you can always contact the bank to refinance the loan, i.e. providing a new loan to pay off the existing one. In this case, a new loan should be taken at a fixed interest rate.
Fixed interest rate
Fixed interest rate - a constant interest rate that is set for a certain period of time and does not depend on market conditions.
See also: Fixed interest rates Interest rates Securities with fixed interest rates
Finam Financial Dictionary.
See what "Fixed Interest Rate" is in other dictionaries:
constant interest rate on Bank loan, established for a certain period, for a certain calendar period. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B. Modern economic dictionary. 2nd ed., rev. M .: INFRA M. 479 s .. 1999 ... Economic dictionary
A constant interest rate on a bank loan, set for a certain calendar period ...
fixed interest rate- a constant interest rate on a bank loan, established for a certain period, for a certain calendar period ... Dictionary of economic terms
Fixed interest rate mortgage- - the percentage determined once at the conclusion and for the entire duration of the contract. This rate, unlike the floating rate, is not subject to revision. A fixed rate can be beneficial to both the lender and the borrower because it allows you to… … Banking Encyclopedia
- (English interest rate) is the amount indicated as a percentage of the loan amount, which the recipient of the loan pays for using it for a certain period (month, quarter, year). From the position of the theory of money, interest ... ... Wikipedia
Interest rate- (Interest rate) The interest rate is the percentage of monetary profit that the borrower pays to the lender for the money capital taken on a loan Determination of the interest rate, types of interest rates on loans, real and nominal interest ... ... Encyclopedia of the investor
- (see FIXED INTEREST RATE) … Encyclopedic Dictionary of Economics and Law
See Fixed interest rate Glossary of business terms. Akademik.ru. 2001 ... Glossary of business terms
INTEREST RATE- (English rate of interest) - the relative value of interest payments on loan capital for a certain period, usually for a year. It is calculated as the ratio of absolute. the amount of interest payments for the year to the amount of loan capital. Distinguish P.s ... Financial and Credit Encyclopedic Dictionary
The interest rate is the amount indicated as a percentage of the loan amount, which the borrower pays for using it for a certain period (month, quarter, year). From the position of the theory of money, interest ... ... Wikipedia
