Interest rate ‘collars’ could make a comeback, in light of the low interest rate environment and the possibility of further cuts.
Traditionally collars, the lowest limit interest will be charged from, were allied to capped rates, giving upper and lower limits to the product. More recently, collars have been applied to discount mortgages.
Ray Boulger, senior technical manager at Charcol, said: ‘Collars are only being used by a few companies, and as far as I know they have had them for a couple of years. We feel these are something that, particularly if rates keep falling, other lenders may introduce so as to give themselves some protection. The main risk is that people perhaps do not realise that the collar is there when they take the mortgage out.’
Simon Jones, associate director of Savills Private Finance, agrees. He said: ‘I think collars are going to be more common, and I think it’s probably right that they do, from a lender’s point of view. I would rather that they were stated clearly, or sooner or later someone is going to be disappointed. People need to be aware that they cannot expect a lender to be sending them a cheque because they have gone into a negative interest situation.’
Coventry Building Society introduced collars in 1995 and since then they have periodically appeared in its portfolio. Currently it has a two-year discount flexible mortgage with a collar.
Yvonne White, media relation’s manager at Coventry, pointed out that the mortgage is being withdrawn, leaving no collared mortgages, but for present holders of the mortgage the collar has not become an issue.
She said: ‘The rate at the moment on that product is down to 3.8%, so anybody who has already bought the product will see that on 1 December, but the base rate would have to fall another 30 basis points before it started since our floor is 3.5%.’
Explaining why collars are introduced in the first place, she said: ‘In a volatile low rate environment at the moment we have to protect rates on both sides, as we have savers as well and must protect our core business.’