If I borrow 200k from a bank or building society to buy a house in say 2018, why is the interest rate on that loan variable for the next 25 years? Shouldn’t it be the internet rate when the bank loans the money to me.
If the bank has loaned me money when interest rates are low, then interest rates go up, aren’t they just creaming off a whole load of profit from me?
In: 10
The technical answer is, because you agreed to it.
The practical answer is, because the way the system is set up means that the cost of the bank incurs for lending money varies with time, and the bank itself has to keep their investment viable. That variance is due to many factors, the most well-known being the rate at which the central bank is lending. That’s the “interest rate” you hear about in the news so often.
The alternative answer is, you don’t have to agree to a variable rate. The bank will be more than happy to offer you a fixed-rate loan, but that rate will be higher to compensate.
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