In these times of low interest rates both businesses and individuals are enjoying lower repayments on loans and credit facilities. A few years ago, with interest rates steadily on the rise (reaching around 5.5% towards the end of 2008), you may have jumped at the chance to fix your rate. The choice has always been to either take a risk on rates staying low and have a variable rate loan or mortgage, or seek to fix your interest rate at a favourable low rate to enjoy certainty and protect against a rise in rates. Which option you take is likely to depend on two things. Firstly your attitude to risk and secondly the availability of fixed rate loans. 

One of the issues for those who wanted a fixed rate loan was that they were not always available. That was partly driven by demand and the lending market conditions at the time. However, some lenders were prepared to provide an opportunity for you to fix your interest rate without a fixed rate loan. How is that possible you might say? One way is known as an interest rate swap often called a "hedge". A hedge is a form of investment. It is a stand alone product which runs alongside your loan. The way it works is quite complicated but it can be summarised in a few sentences. 

The hedge sets a notional fixed interest rate. If the interest rate payable on your variable loan goes up then the hedge provider agrees to pay you the difference between the variable rate and the notional rate fixed for the hedge product. You pay more interest on your variable loan as rates rise, but you get it back from the hedge. If interest rates go down you pay less interest on your loan but must pay the difference between the notional interest rate on the hedge product and the rate you are actually paying on your variable loan to the hedge provider. 

In principle the concept works, and if products are explained properly to customers they serve as a helpful alternative to fixed rate loans for both businesses and consumers. Those who entered into these swaps were set to benefit if rates stayed high or continued to rise. However, what was not always explained was that if rates fell, as they have done, money would need to be paid back to the hedge. In addition providers have sometimes failed to take into account a borrower's financial circumstances. 

A hedge is an investment product and rules govern their sale. If these rules are not followed then you may end up with an unsuitable and costly investment. 

Foot Anstey has extensive experience of recovering losses as a result of financial mis-selling. If you or your clients have a hedge product then you should consider whether you might have lost out. 

For further information or advice on financial mis-selling and whether your business might have been affected, Matthew Dunne can be contacted on 01392 685374 or email matthew.dunne@footanstey.com  



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