There is a case in Finland at the moment where a bank has potentially misrepresented itself in a contract regarding their loan collar offer. Or, people have misunderstood what is actually happening. There is still some ambiguity on which, but at the very least, there is an error in the contract offer (not the contract signed) and what people have understood.
Essentially, customers were told that they would have a capped loan repayment amount, without understanding that it is roof on the interest amount. I spoke about this in this post the other week, so will steal the image from there.
What people have understood is that their total loan amount isn't going to change, so if they bought the collar for the next ten years, they would pay the same monthly amount. But, this is not the case when the cap is on the interest rate, because as the reference rate changes upward, the repayments will increase, but only so far. The "security" is in the upper limit, not the initial monthly payment. This means that the "maximum reference rate" is the thing that matters, and this is going to change depending on when you are applying for the loan.
Using mine as the example, it shows the maximum reference rate is 1.2%. At the time I took the loan, the 6 month Euribor was something around 0.65%, because it was just prior to Covid. At that point, I would pay slightly more than the reference, but know the upper ceiling was very manageable. However, the current collar for the same package (12 month Euribor though) has a maximum reference rate of 4.5%, almost 4x what mine is now. But, the actual reference rate is 4.078%.
Taking the Collar is a "bet" on whether the interest rates are going to go up or down, but the cost of that bet can change significantly. When we took our loan, the cost of taking the bet was something like 0.1% on our loan at a time when interest rates were incredibly low. The bet was very cheap to take. However, if taking that same bet now, it could be that rates fall, but still paying significantly more than if just taking the Euribor rate, due to the percentage fee of the collar.
The banks aren't stupid, they know how the game works, so they are going to look to maximize their profits. Their business models don't align with the financial wellbeing or benefits of their customers, as they are looking to maximize wealth from their customers. It is kind of strange in some way that they are in direct competition with those they serve, especially given the power they have over the economy as a whole.
But while the banks aren't stupid, this contractual misunderstanding does highlight that thousands of people at least, don't have good enough financial knowledge to grasp the concepts, or ask the right questions. There are ways to keep a loan repayment static, but what that does is increase the loan repayment schedule, and it will end up being interest only, adding potentially years to the loan time. Locking in the loan repayment amount, should raise many questions as to the mechanics of what is actually happening, especially in a time like the last couple years with rising interest rates being so visible in the media. And, since the person who highlighted this being a journalist herself, they can't really say they haven't seen the conversations.
Collars are great on a loan, but it depends heavily on the cost of the collar and the time that it is taken. With interest rates expected not to rise much more from here, it may be better not to have a collar on the loan. However, if able to go back in time to pre-Covid, it definitely made sense to get one, as the interest rates were already incredibly low, so the additional cost was insignificant. For example, my wife and I were paying something like 7€ more a month to have the ten year collar, but now it is saving us several hundred two years later. Not only that, it allows us to pay down the principal faster, rather than like many, pay the interest only on the loan.
This is because even though money was cheap for a house loan, we didn't take all we could get, rather, we stayed well within our means, just in case interest rates increased. This was because after over a decade of the lowest rates ever (even minus), there was only one way they could go that would cost us. So, while people took significantly more to get a "better" home, a few years later those same people are struggling because they didn't allow for their future financial situation. One where interest rates are high, inflation is high, energy costs are high, and salaries aren't increasing proportionally.
I feel bad for the people who have misunderstood the concept of what is literally called the interest rate ceiling in Finnish, because they didn't apply it to the interest rate. If
they had called it the repayment ceiling, that might have been different. However, I really hope that the bank is brought into question and either are forced to honor the misrepresentation where appropriate, or compensate those affected.
I don't think banks should be allowed to prey on financial illiteracy, but at the same time, I believe that we should each spend some of our attention to better understand our personal finances and what affects it. At some point, we have to take responsibility and do our own due diligence, but if we don't even understand the terms used, we are going to have a hard time. We should know by now though, we can't rely on having our best interests met, by a corporation who benefits from not meeting it.
Taraz
[ Gen1: Hive ]