Why would financial institution fund a 1% CFA loan?
It doesn’t take too much to realize that if you are paying only 1% on a mortgage, your mortgage payments are a lot less. But who, in their right mind, would loan you money at 1% when they could loan it out at 5%, 6% or more? The answer? The 1% interest rate represents the interest rate your payments are based upon. However, this is not the rate at which the money is being loaned out. The “actual” interest rate, called a “fully indexed rate”, consists of 2 rates: the “index rate”, and “the margin”. The index rate comes from the places interest rates on mortgages come from – such as LIBOR. “The margin” is an additional amount charged by the bank, above and beyond the LIBOR. This is pure profit for the bank and one reason why banks will loan money on a CFA loan. Let’s take a quick example. If the index rate (the LIBOR) is 4% and the margin is 2.25% , then the fully indexed rate would be 6.25%. This is the actual amount of interest being charged to the loan. • What happens to the differenc
Related Questions
- What is the minimum loan term for permanent financing? When can the loan be renewed and will the financial institution receive credit a second time if the loan is renewed?
- If the CALIA+ application involves the refinancing of a loan from another financial institution, does the borrower need to notify them?
- Can I use my holdings in The Stanbic IBTC Guaranteed Investment Fund as collateral for a loan?
