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.
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.
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 Bank of Melbourne Financial Markets representative will be happy to provide an indication of costs when you discuss your requirements with them.
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 Bank of Melbourne). 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.
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.
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.