Mortgage prepayments have a real cost for banks

Our beloved politicians are again launching some 'good ideas' (see article in comments #detijd) Obviously it is nice for a politician to state that consumers will no longer need to pay if they want to prepay their fixed rate mortgage loan. Each and every consumer will be in favour of this, great idea to launch 3 months before the elections.

But the current legislation, allowing Belgian consumers to prepay their 25 year fixed interest rate at the expense of only 3 months of interest, is already one of the most flexible in Europe.

Each prepayment (or rate review, wich is actually the same) that happens at a moment of lower interest rates (which is typically the time when consumers ask for prepayment) comes at a cost for the banks. A cost that is often substantially higher than the 3 months interest that the consumer pays as indemnity.

So are the politicians aware about the side effects of this idea?

• Banks will prefer, or only offer, variable rate mortgages
• Or Banks will price significantly higher their fixed mortgage rates, in line with the higher actual costs, since more swaptions will need to be purchased to cover the risk
• Taking away one of the reasons why the Belgian Real Estate market as being one of the most stable in the EU: since mortgage installments will vary more in time, in some cases creating financial difficulties for consumers, forcing them to sell their appartment/house

If the government wants to proceed with this idea, I think they need to be consistent*. Hence they should also allow consumers to ask to review the interest rate of a government bond. The government now still pays some of the consumers near zero interest rate, 'a disgrace'.

#banking #interestrates #mortgages #loans

* it could be that the standard politician will need to look up this word, since there is only a course of 'How to get away with a set of inconsistent proposals without blushing' in the advanced curriculum of the University of Politicians