From The Daily Express:
MORTGAGE lenders slashed rates yesterday as competition returned to the revitalised housing market... The Co-operative Bank has the best rates, with two-year fixed rate deals of 4.49 per cent for those with a 15 per cent deposit and 3.19 per cent for customers with 25 per cent deposits.
Neither of those rates sound too bad, do they? However, let's play compare-and-contrast...
Borrower A has a £15,000 deposit, borrows £85,000 and pays £3,816.50 interest.
Borrower B has a £25,000 deposit, borrows £75,000 and pays £2,392.50 interest.
Subtract B from A and we note that A is paying an extra £1,424.00 interest on extra borrowings of £10,000, which looks a bit like 14.24% to me. If we work on the basis of a 25 year repayment mortgage, the difference comes down slightly to 12.59%, but that's still one heck of an interest rate.
Is the Co-op Bank working on the basis that there's a good chance that house prices will fall by more than fifteen per cent? In which case, you could look at it this way: Borrower A is actually paying 3.19% on the whole of the £85,000 and a risk premium of 11.05% on the amount of the loan that exceeds 75% loan-to-value.
Forbidden Bible Verses — Genesis 10:21-32
1 hour ago
15 comments:
You could (ab)use numbers like that all day to make things look worse than they are.
For example 14.24%/4.49% is a whopping 317% increase over the headline rate!!!!one!
Your rate only applies *iif* borrower A actually gets the other £75,000, and thus you cannot ignore that other £75,000 which you're conveniently doing in order to get your misleading result.
We have the concept of AER/APR in this country to stop *precisely* these sorts of shenanigans with numbers to make them more/less appealing to a generally ignorant public.
That must be why APR is so good when applied to payday loans, giving 2500 - 3500%, because it "avoids shenanigans".
APR indicates the cost of credit if certain assumptions are held to be true. The last thing on earth MW needs is me speaking out for him (you can hear the "but", can't you?) but since - sadly - it appears lost on you, what he's talking about is the marginal cost of borrowing more money at a higher loan to value - a premium charged for additional risk.
Now, back to your Daily Express at once :-)
I fully understand that it's the marginal cost of borrowing, but that marginal cost isn't incurred unless the bit before the margin being considered is acquired.
Let's (just for fun) look at the cost of that bit of the loan for A, which wasn't mentioned:
(3816.5-2392.5)/75000 = 1.90%
Which, surprise, surprise, is somewhat less than what B is paying for it.
So A might be said to be, using Mark's argument, getting a bargain since they're paying 1.29% (or £1,424) less for £75,000 than B.
Not to be sneezed at, as I'm sure you'll agree ;)
And pay-day loans *are* daylight robbery - hence the high APR.
If they *were* only occasional (i.e. one-off) borrowings for a week or so then paying (from one site I found) £25 for a loan of £100 would probably be worth the convenience if there was absolutely no other way of getting that money, but I'm sure that most who use pay-day loans aren't only using them occasionally. So they are paying silly amounts for what they're actually getting.
PJH, payday loans are not robbery, daylight or otherwise. They are simply credit agreements entered into voluntarily by both parties, at a rate which takes into account the creditworthiness of the borrower.
Apparently, you would not currently consider paying 25% interest, and neither would I, but if you needed credit and were unable to get it at a lower rate, you would welcome it.
but if you needed credit and were unable to get it at a lower rate, you would welcome it.
Isn't that what I said?:
£25 for a loan of £100 would probably be worth the convenience if there was absolutely no other way of getting that money
Yup - thought it was.
But did you not also say "And pay-day loans *are* daylight robbery"?
Yup - thought you did.
Robbery involves taking property without the owner's permission.
I said they were 'daylight robbery' Ian, not 'robbery.' There's a non-so-subtle difference between them.
You appear to be unaware of the meaning of that phrase thus:
an exorbitant charge for a product or service
Now, do you agree, or disagree, that pay-day loan charges are exorbitant? I think they are.
PJH, I have added a final sentence which hopefully makes it clear to you. Your second calculation is a bit daft, as you assume that Borrower A is paying the 4.49% interest on the whole loan, but on the assumption that he is, then of course he is paying 1.3% more than Borrower B (4.49% minus 3.19%).
FT, exactly.
IB, agreed, payday loans are incredibly expensive (and you'd have to be stupid or really desperate to use them), but that doth not make them 'robbery'.
Under "Daylight robbery", my Collins dictionary has "blatant overcharging"; if you're unable to get the service at a lower charge, it's hardly "overcharging",is it?
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