Loralie SA

Banks facing a conflict of interest in mortages

A plausible explanation is the conflict of interest faced by many banks.

 

Explanation: Banks invest short-term money deposited by their savers over long periods, for example in fixed-rate mortgages. As the funds invested remain blocked over a long period of time, banks may ask in return for a higher interest than that which they pay to savers.

Therefore many of them recommend medium to long term fixed mortgages and only offer money market mortgages on specific request. Others charge interest so high that customers prefer to opt for a fixed rate mortgage.

 

This conflict of interest also has the effect that the terms are fixed without a well-defined strategy. Yet, only a strategy can determine the right mix of mortgage models and terms.

 

Choosing a fixed mortgage is only wise in the event of a sharp rise in rates. But if the mortgagee expects constant or even declining rates, the money market mortgage is the best option.

Mortgage intermediaries are not immune to conflicts of interest, as most live off commissions.

 

The longer the term of the mortgage, the higher the commission. There is therefore a strong incentive to recommend fixed mortgages of the longest possible duration.

The corollary is that customers must bear considerable additional costs over the years.

 

Good to know: A fixed mortgage offers budgetary security,but is not without risks. A change of job, illness or divorce can force you to sell your property and terminate the mortgage early, which is very expensive. It is therefore recommended to choose different mortgage models with terms that differ by a maximum of three years.

 

A fixed rate mortgage is only attractive if the rates rise sharply and stay high for a long time. However, you can protect yourself against the risk of rising rates with a money market mortgage.

 

Source : VZ news 124 February 2021, p 9 vzch.com