Options
A guide to the financing options in the UK market, viewed from the borrower’s perspective.
The various options are explained in terms of their three basic building blocks: caps, floors and floating rates.
A guide to floating rates. The official UK floating rate benchmarks are Base Rate and SONIA.
The mechanics and risks of interest rate caps. Caps insure borrowers against high interest rates.
With a capped loan, the borrower pays the floating rate or the capped rate, whichever is the cheaper.
The mechanics and risks of borrower floors. Borrower floors may be applied to offset adverse floors.
The mechanics and risks of the adverse floors contained in collars, swaps and fixed rate loans.
Floored loans
With a floored loan, the borrower pays the floating rate or the floored rate, whichever is the more expensive.
The mechanics and risks of interest rate collars. A collar combines a cap in the borrower’s favour with an adverse floor.
The mechanics and risks of interest rate swaps. A swap combines a cap in the borrower’s favour with an adverse floor.
Collared loans
The mechanics and risks of collared loans. A collared comprises a floating rate loan with a cap in the borrower’s favour offset by an adverse floor.
Fixed rate loans
The mechanics and risks of fixed rate loans. A fixed rate loan comprises a floating rate loan with a cap in the borrower’s favour combined with an adverse floor.