Capped Tracker Mortgage?

fergie_

The banks now limit how low rates can go on a tracker / discounted mortgage so that they can no longer go negative (like they did back in 2008).

Why not have have tracker products that are capped at the top? So it is linked to base rate, but has a ceiling. That would give the best of both worlds while still allowing some flexibility in a volitile market.

ForumUser7

fergie_ said:

The banks now limit how low rates can go on a tracker / discounted mortgage so that they can no longer go negative (like they did back in 2008).

Why not have have tracker products that are capped at the top? So it is linked to base rate, but has a ceiling. That would give the best of both worlds while still allowing some flexibility in a volitile market.

Because if the base rate went really high, and far above the cap, the bank would potentially be making a loss compared to what they could have if they did not have the cap in place. The lower limit ensures you always have to pay something in interest, and if it is 0% as the floor, it prevents them having to pay you on the off chance the BR goes negative.

In other words, a lower limit that is a positive number benefits the profits of the bank. A lack of a higher limit also benefits the profits of the bank

ACG

There used to be "cap and collar" mortgages - ie they are variable with a top and bottom end. 

The problems are:
1) They were not really in high demand,
2) You said it yourself, the rate is volatile - why open themselves up to that risk,
3) All rates at the minute are quite close together. It cant be cheap with a buffer as you can just get a conventional tracker and there is no point in having a higher rate as people will just go fixed. 

The demand was not there, the risk tot he lender is high and the ability to make a profit from it is pretty limited. 

amnblog

Cap and Collar mortgages were more a question in regulatory exams that a reality.

Lenders do like a Collar, they do not like a Cap.

fergie_

Interesting views about caps, but surely a fix is very close to a cap?

amnblog

No
A Cap goes down and up to an upper limit
A Collar goes up and down to a lower limit
A Tracker goes down and up (often with a Collar in the small print)
A Fixed does not move

fergie_

amnblog said:

No
A Cap goes down and up to an upper limit
A Collar goes up and down to a lower limit
A Tracker goes down and up (often with a Collar in the small print)
A Fixed does not move

I was meaning in terms of your comment that banks don't like Caps, but surely they dislike fixes more, when rates are well above the fix?

ACG

fergie_ said:

amnblog said:

No
A Cap goes down and up to an upper limit
A Collar goes up and down to a lower limit
A Tracker goes down and up (often with a Collar in the small print)
A Fixed does not move

I was meaning in terms of your comment that banks don't like Caps, but surely they dislike fixes more, when rates are well above the fix?

If a lender buys in the money at say 5%. 
If the rate is fixed and they sell it at 6%, they know their profit margin. 

If if they buy the money in on a variable rate and sell it at a margin above, again they know their profit margins. 

If they cap it, they may not retain those profit margins.