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Discuss one of the risks of a variable rate loan.

  • fp/101 -

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  • fp/101 -

    The interest rate can go up, making it increasingly difficult or impossible to make the payments. Then your collateral can be taken away.

  • fp/101 -

    You should discuss risk in terms of probability and consequence. One good way to present the results is to do a chart or grid with probability (low, med, high) on one axis and consequence (none, medium, severe) on the other. This gives a 3x3 grid, but you could do say 5x5. The put the risk in one of the squares, which you could colour red, amber, green.

    Let's say interest rate goes up by a small amount, 1%, high probability. Consequence might be slightly reduced available cash, so medium consequence. This we might colour amber.

    Let's say interest rate goes down by 1%, medium probability. Consequence more available cash, low consequence. This you might colour green.

    Get the idea?

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