What mortgage variable interest rate indices are commonly used? What should management consider when choosing an index?
The Prime rate is the most commonly used index. The reason Prime rate is most often used is that it is easily recognized and tracked by member borrowers. Other commonly used indices are the US Treasury yield curve, the 11th District Cost of Funds and LIBOR. The 11th District Cost of Funds (COFI) has been used in the past, but due to its regional nature and lagging status it has fallen out of favor. Credit unions should take into consideration how the other side of the balance sheet is pricing and try to match interest rate indices as well as possible. A question not asked, but which is important – is how often should the variable loan rate be adjusted? A quarterly adjustment will probably result in the least amount of interest rate risk, because deposit rates often change quarterly. There are marketing considerations as well, because members will compare the frequency of the variable rate adjustment.
