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
No. The bank has to pay out interest usually near the current interest rate to borrow money in the short term and it pays interest to depositors at a variable rate too. So the cost of lending you the money varies with time.
The bank offers a variable interest rate loan to balance out the interest it receives and what it pays. If it offered you a fixed interest loan, then it will charge a higher interest rate because the bank won’t know the future interest rate it has to pay.
Remember the bank takes deposits and makes loans.
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