Join Mailing List

For latest news and information about Treasury and Financial Markets, enter your details below:

Mortgages - is the FTP the cost of one year money?

Print Preview Send to a Friend Share

Published: 7th February 2012 by William Webster

Should a long dated mortgage asset be priced off the long dated cost of money? Or should it be priced off a shorter rate reflecting the fact that firms finance by borrowing short term and rolling this over?

Albeit that the cost of refinancing can be “modelled” to imply an increased charge for future stressed market conditions. The answer must depend on the maturity of the mortgage.

This may substantially vary from its contractual maturity. Ignoring amortisation and pre-payments consider three types of mortgage - fixed rate, tracker and administered.

With the first two a firm cannot increase the spread it charges. With the administered it can.

If the original mortgage term was 25 years and this was financed by one year retail money what liquidity risk is being run?

In the case of fixed and tracker products it is large. The firm must pay whatever it takes to refinance and the customer has no incentive to pre-pay. But with an administered rate product there is a difference – the cost can be passed on. Furthermore a firm could use the administered rate to accelerate repayment by simply making it uneconomic for the customer to stay.

In this way you could argue that an administered mortgage has a much shorter duration and therefore could be priced off short term funding rates. How short those rates should be is open to conjecture. You could argue that a 1 year rate is sufficient and that this is consistent with a matched maturity approach to FTP.

With TCF it would be helpful to get a regulator’s view on this.

Displaying 1 to 6 of 6 results in total.

Related Documents

Free to ViewWrite Mortgages, Wrong Price? 100% relevant

11th September 2020

Selling mortgages with interest rates of between 1% and 4% may seem like an opportunity too good to miss, particularly now Bank rate is 0.10%, but is this too good to be true? Let’s see.


Registration RequiredMarket Guides > The all in cost of fixed rate issuance 83% relevant

19th September 2009

Borrowers (issuers) often use the bond market to access medium and longer dated funding. Some issuers prefer variable rate liabilities, some fixed rate liabilities. All issuers want to be able to borrow the required amount at the lowest possible cost but just how does a fixed coupon bond issuer calculate the cost of funds on a floating rate basis? Let's see.


Registration RequiredMarket Guides > The all in cost of floating rate issuance 83% relevant

20th September 2009

Floating rate notes (FRNs) are bonds that pay investors a regular coupon linked to short term interest rates like three or six month Libor. This can suit the investor and issuer alike. The cost of issuance is key to the borrower. Discounts to par value and margins must be taken into account. Find out more about the all in cost.


Free to ViewFTP Discussion Group 53% relevant

7th February 2012

The presentation for the discussion group held at Mutual One on 25/1/12 and 3/2/12.


Free to ViewDealing With Uncertainty - Part One 50% relevant

2nd June 2020

I’ve always felt uneasy about stress tests, it’s a bit surprising, after all they should provide comfort that, if the unexpected happens we have cover. Are we right to think they strengthen what we do?


Free to ViewMoney Markets & Foreign Exchange 43% relevant