Interest Rate Caps, Floors and Collars

Interest Rate Caps, Floors and Collars are option-based Interest Rate Risk Management products.

These option products can be used to establish maximum (cap) or minimum (floor) rates or a combination of the two which is referred to as a collar structure. These products are used by investors and borrowers alike to hedge against adverse interest rate movements.

A Cap provides variable rate borrowers with protection against rising interest rates while also retaining the advantages of lower or falling interest rates.

FAQs about Interest Rate Caps, Interest Rate Floors and Interest Rate Collars - Borrowers.

Interest Rate Caps - FAQs

Who uses Interest Rate Caps?

Variable rate borrowers are the typical users of Interest Rate Caps. They use Caps to obtain certainty for their business and budgeting process by setting the maximum interest rate they will pay on their borrowings. By implementing this type of financial management, variable rate borrowers obtain peace of mind from rising interest rates but retain the ability to benefit from any favourable interest rate movements.

How does an Interest Rate Cap work?

An Interest Rate Cap ensures that you will not pay any more than a pre-determined level of interest on your loan. St.George will reimburse you the extra interest incurred should interest rates rise above the level of the Cap. An Interest Rate Cap enables variable rate borrowers to retain the advantages of their variable rate facility while obtaining the additional benefits of a maximum interest rate.

How much does an Interest Rate Cap cost?

The cost of the Cap is referred to as the premium. The premium for an Interest Rate Cap depends on the Cap rate you want to achieve when compared to current market interest rates. For example, if current market rates are 6%, you would pay more for a Cap at 7% than a Cap at 8.5%. The premium for an Interest Rate Cap also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Over what period can I obtain a Cap?

An Interest Rate Cap can be purchased for a minimum term of 90 days and a maximum term of five years. When the Actual Interest Rate rises above the Cap Strike Rate the Bank will reimburse the extra interest to the customer.

Is there a minimum amount for an Interest Rate Cap?

We will be pleased to quote on Interest Rate Caps of $1,000,000 or more.

What happens if I repay my loan early? Can I cancel the Cap?

Interest Rate Caps are totally separate to your loan facility (you may have even borrowed from another bank and entered into an Interest Rate Cap with St.George). If at any time you repay these borrowings you can either let the Cap run to maturity or you may terminate it. Depending on interest rate movements there may be some remaining value of the Cap. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Cap?

There are no risks associated with an Interest Rate Cap. It is important to understand that if interest rates do not rise above the Cap rate, you have not obtained any benefit from the purchase of the Cap.

What other information is required?

If you decide you can benefit from an Interest Rate Cap you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

How do I arrange a Cap?

Please phone your St.George Financial Markets representative to discuss your needs.

Interest Rate Collars - Borrowers - FAQs

Who uses Interest Rate Collars?

Variable rate borrowers are typical users of Interest Rate Collars. They use Collars to obtain certainty for their borrowings by setting the minimum and maximum interest rate they will pay on their borrowings. By implementing this type of financial management, variable rate borrowers obtain peace of mind from the knowledge that interest rate changes will not impact greatly on the borrowing costs, with the resultant freedom to concentrate on other aspects of their business.

An Interest Rate Collar is simply a combination of an Interest Rate Cap and an Interest Rate Floor. You receive payment of a premium from St.George to purchase the Interest Rate Floor which offsets the premium that you pay for the Interest Rate Cap. As such the premiums payable for an Interest Rate Collar are less than the premium payable for an Interest Rate Cap.

How does an Interest Rate Collar work?

An Interest Rate Collar ensures that you will not pay any more than a pre-determined level of interest on your borrowings. St.George will reimburse you the extra interest should interest rates rise above the level of the Cap. An Interest Rate Collar however, will not allow you to take advantage of interest rates below a pre-determined level. You will be required to reimburse St.George the extra interest should interest rates fall below the level of the Floor. An Interest Rate Collar enables variable rate borrowers to retain the advantages of their variable rate facility while obtaining the additional benefits of a maximum interest rate, at a reduced cost to an Interest Rate Cap.

How much does an Interest Rate Collar cost?

The cost of the Collar is referred to as the premium. The premium for an Interest Rate Collar depends on the rate parameters you want to achieve when compared to current market interest rates. For example, as a borrower with current market rates at 6%, you would pay more for an Interest Rate Collar with a 4% Floor and a 7% Cap than a Collar with a 5% Floor and a 8.5% Cap.

The premium for an Interest Rate Collar also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. It is possible to achieve a net zero premium. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Over what period can I obtain a Collar?

An Interest Rate Collar can be purchased for a minimum term of 90 days and a maximum term of five years.

For borrowers, should the actual interest rate rise above the Cap Strike Rate, St.George will reimburse you the extra interest. If the actual interest rate fall below the Floor Strike Rate, you will reimburse the extra interest to St.George.

Is there a minimum amount for an Interest Rate Collar?

We will be pleased to quote on Interest Rate Collars of $1,000,000 or more.

What happens if I need to repay my loan early? Can I cancel the Collar?

Interest Rate Collars are totally separate to your borrowings (you may have even borrowed from another bank and entered into an Interest Rate Collar with St.George). If at any time you need to retire your borrowings, you can either let the Collar run to maturity or you may terminate it.

Depending on interest rate movements there may be some remaining value of the Collar. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Collar?

There are risks associated with an Interest Rate Collar. It is important to understand that if interest rates fall below the Floor rate, you will have missed out on the potential reduction to your cost of funds. The cost advantages over an Interest Rate Floor may or may not compensate for this potential loss. Only you can decide if the premium savings outweigh the potential of reduced cost in a falling interest rate environment.

What other information is required?

If you decide you can benefit from an Interest Rate Collar you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

How do I arrange a Collar?

Please phone your St.George Financial Markets representative to discuss your needs.

Interest Rate Floors - FAQs

Who uses Interest Rate Floors?

Variable rate investors are the typical users of Interest Rate Floors. They use Floors to obtain certainty for their investments and budgeting process by setting the minimum interest rate they will receive on their investments. By implementing this type of financial management, variable rate investors obtain peace of mind from falling interest rates and the freedom to concentrate on other aspects of their business/investments.

Q. How does an Interest Rate Floor work?

An Interest Rate Floor ensures that you will not receive any less than a pre-determined level of interest on your investment. The Bank will reimburse you the extra interest incurred should interest rates fall below the level of the Floor.

An Interest Rate Floor enables variable rate investors to retain the upside advantages of their variable rate investment while obtaining the comfort of a known minimum interest rate.

How much does an Interest Rate Floor cost?

The cost of the Floor is referred to as the premium. The premium for an Interest Rate Floor depends on the Floor rate you want to achieve when compared to current market interest rates. For example, if current markets rates are 6%, you would pay more for a Floor at 5% than a Floor at 4.5%.

The premium for an Interest Rate Floor also depends on the rollover frequency and how you make your premium payments. We will endeavour to structure the payments to suit your cash flows. Your St.George Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.

Q. Over what period can I obtain a Floor?

An Interest Rate Floor can be purchased for a minimum term of 90 days and a maximum term of five years.

When the actual Interest Rate falls below the Floor Strike Rate the Bank will reimburse the extra interest to the customer.

Is there a minimum amount for an Interest Rate Floor?

We will be pleased to quote on Interest Rate Floor of $1,000,000 or more.

Q. What happens if I require my funds early? Can I cancel the Floor?

Interest Rate Floors are totally separate to your investment (you may have even invested with another institution and entered into an Interest Rate Floor with St.George). If at any time you recall your investment, you can either let the Floor run to maturity or you may terminate it.

Depending on interest rate movements there may be some remaining value of the Floor. The Bank will pay this remaining value to you on termination.

Are there any risks associated with an Interest Rate Floor?

There are no risks associated with an Interest Rate Floor. It is important to understand that if interest rates do not fall below the Floor rate, you have not obtained any benefit from the purchase of the Floor.

What other information is required?

If you decide you can benefit from an Interest Rate Floor you will be required to sign the Bank's standard terms and conditions. These documents are easy to read as they have been written in plain English. They summarise the terms and conditions under which you agree to deal with the Bank.

How do I arrange a Floor?

Please phone your Financial Markets representative to discuss your needs.

Need more information?

If you have any questions or want more information, you can contact us online or call us toll free on 1300 665 616.

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