Question

3. A borrower is unsure whether to go with a fixed rate or adjustable rate loan. What kind of questions would you ask to help them decide?

Answer 1

Borrower must look at his risk appetite and his overall exposure limits so,he will then decide whether he wants to go for a fixed rate loan or adjustable floating rate loan.

fixed rate loan are those loans in which the interest rate are always fixed in nature for the borrower and borrower will not have the flexibility of adjustment of the interest rates to the market rate, but in the scenario where the market rate of interest are high and the fixed rate of interest are lower, the borrower will be eventually be the gainer,and in scenarios where prevalent market rate of interest is low and the fixed rate of borrower is higher, then borrower would be paying a higher cost

floating rate or adjustable rate of interest always provide a hedge against interest rate risk because it is always kept on adjusting with the prevalent market rate of interest so a borrower does not need to worry about the fluctuation in the interest rate and he would be accountable to pay with the market rate of interest.

The borrower should only decide after looking of his risk appetite and willingness to have exposure in interest rate fluctuations or not.