Definition
Board Rate
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The board rate is quite possibly the longest surviving type of interest rate structure for home loans today.
It’s hardly surprising as they have as these are interest rate benchmarks that the banks can pretty much determine as and how they like it.
This is because little is known about how these internal board rates are set.
Even in a bank, probably more than 90% of employees would not have the answers to the question either.
As times have changed, the lack of transparency of board rates have led to them being avoided by more and more borrowers.
In fact, most people who sign up for them these days probably do so because they don’t have any alternatives to choose from as that particular lender is the only one willing to approve their loan requests!
While board rate housing loans can sometimes throw up pretty attractive deals, the biggest drawback is that the bank has to right to adjust them upwards or downwards whenever they want, for whatever reason they want.
This means that market forces don’t play a role in the setting of them, except when the bank feels threatened by competing lenders offering competitive rates.
But that can mean nothing when a bank is targeting a different consumer market.
For example, some lenders might focus on borrowers with adverse credit. These profiles of borrowers would have been shunned by all other banks, leaving them with a lender who would only offer the borrower a board rate loan.
Because of the bad reputation board rates have garnered in the past, marketers can disguise board rates with other aliases hoping that borrowers would not notice.
Some common alternative names include:
- Prime rate
- Mortgage rate
- Variable rate
- etc
But don’t be fooled. They are all the same.
As long as a home loan does not have a fixed rate or an index pegged rate, and the lender reserves the right to change the rate as and when they please as long as they send a notification in advance, it is a board rate mortgage.
Some board rates have stayed at the same level for years. Especially when we consider that the world economy has yet to fully recover from the setbacks of 2008.
While other board rates actually state in loan contracts that they would be reviewed every few months. Meaning an interest rate hike is always on the horizon with no place to hide.
When is board rate a good choice?
As mentioned earlier, most people who accept board rate housing loans these days don’t have a choice.
Because if they do, then it almost certain that with some homework, they would be able to find a better and more attractive loan elsewhere… and even more transparent interest rates.
But there are times when board rate loan have very low interest rates during the initial few years of the loan.
While they are certain to rise after a few years, property buyers who fully intend to sell the house in the short term can take advantage of the low teaser rates and diverse the property before higher interest rates kick in.
The same with home buyers who fully intend to refinance the loan as soon as the lock-in period expires.
However in this case, take note that refinancing is never something that is certain. There is every chance that one would not be able to refinance the debt in future.
This could be due to changes in the lending environment like TDSR policies.
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