Adjustable Interest Rates
  • 03 Dec 2024
  • 5 Minutes To Read
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Adjustable Interest Rates

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Article summary

Adjustable Interest Rate (AIR) loans allow users to have all available interest rate types on fixed interest rate and index interest rate loans, and to switch between them based on defined time periods. You can set as many interest rate sources as possible at an account level, which offers more flexibility.

Note

If you wish to use Adjustable Interest Rates, please get in touch with your Mambu Customer Success Manager or contact us through Mambu Support to discuss your requirements.

Use cases

A loan could have a fixed interest rate for the first three years of the account's term, and switch to an indexed interest rate for the remainder of the loan's term. This gives loans the ability to handle a number of products with similar behavior, such as honeymoon rate periods, rest periods, loyalty discount rate spreads, and government-subsidized rates.

AIR Usages

Negative spread discounts

Negative spreads can be used to lower the index rate of an AIR loan, which allows lenders to offer specific discounts while still keeping the rate pinned to the index, which can go up or down for the entire portfolio. For instance, this can provide banks the flexibility to refinance and differentiate between their front-book and back-book rates.

For example, if the Index rate = 2%, and the Spread = -0.01%, the rate then becomes 1.99%.

The allowNegativeInterestRate flag must be set to true to allow for negative spread discounts.

Adjustable Interest Rate setup

AIR offers the possibility to set up a list of interest rate sources at both a product and account level. The following settings are used to configure AIR:

  • validFrom date: the period from which an interest rate becomes active
  • Interest Rate Source: Fixed or Index
  • Interest rate/Spread %
  • In the case of an Index interest rate, you will also define:
    • Rate source
    • Interest rate ceiling
    • Interest rate floor
    • Interest rate review frequency

Product level setup

At the product level we can define only one Fixed interest rate source with the following details:

  • Interest Rate: default/min/max

However we can define multiple Index interest rate sources - as long as they already exist in the Administration area - with the details described above.

The period of the interest rate source (validFrom) is not defined at a product level.

See below to learn more about migrating products to AIR via the API.

Account level setup

To create a loan account with AIR:

  • At account creation you should define the periods (valueFrom date for each interest rate source.
  • The anticipated disbursement date should be the same as the first validFrom date for the first AIR settings, in order to fulfill the main use case. For example, the first two years should be fixed and after that it should be variable.
  • Only an AIR set at the product level can be defined at the account level.
  • You can define multiple fixed interest rate sources at an account level for different periods (validFrom dates) and with or without different rates.
  • You can define the same index interest rate sources at the account level but with different periods (validFrom dates) and with or without different rates.
  • You can overwrite the values in the product level at the account level for each interest rate source.

Disbursing a loan account with AIR

For more information, refer to Disbursing a Loan.

  • When the anticipated disbursement date and the validFrom defined for the first AIR period from loan account creation is different than the disbursement date - for instance, when the account and disbursement are done on different days - then the API flag or UI checkbox shiftAdjustableInterestPeriods will do the following actions:
    • If false (un-checked): the AIR validFrom date will be the one from the loan account creation moment. This will then define the start of the AIR from the loan account creation moment, rather than the disbursement moment.
    • If True (checked) : Mambu will automatically move the validFrom date for all AIR periods to be from the disbursement date. This will then define the first period of the Fixed/Index interest rates from the disbursement date.
    • If it is not specified, the default value will be false.
  • if shiftAdjustableInterestPeriods is not passed in a case where the disbursement date is not equal to the firist AIR validFrom date, the disbursement call will return an error notifying you that the disbursement date is different from the first valid from date. You will need to either adjust the dates to match the disbursement, or pass shiftAdjustableInterestPeriods as true.

Negative interest rate spreads via AIR

Adjustable Interest Rates can be used to achieve a negative spread, which will decrease the overall applicable interest rate for a product.

Use case examples

  1. Multiple interest sources that were defined at the product level, in any order:
  • Product level:
    • Fixed Interest Rate
    • Libor Index Interest Rate
  • Account level:
    • From 01.09.2021 Fixed Interest Rate with 5%
    • From 01.12.2021 Fixed Interest Rate with 7%
    • From 01.03.2022 Libor Index Interest Rate with 2% interest spread
  1. One interest source defined at an account level, with the condition that the source Index rate should be available in Administration:
  • Product level:
    • Fixed Interest Rate
    • Libor Index Interest Rate
  • Account level:
    • From 01.09.2021 Libor Index Interest Rate with 2% interest spread
  1. AIR with the first two years Fixed Interest Rate, and thereafter an Index Interest Rate:
  • Current date 01.01.2021. Create a loan account with AIR:
    • Anticipated disbursement date: 01.01.2021
    • First repayment due date: 01.02.2021
    • AIR setup:
      • Valid from 01.01.2021 Fixed Interest Rate with 10% interest rate
      • Valid from 01.01.2023 Index Interest Rate with 5% interest spread
  • Current date: 15.01.2021: Approve the account
  • Current date: 15.01.2021: Disburse the account
  • Expected result: we need to keep the use case of having first 2 years fixed interest rate and after that index from the disbursement moment.
  • Solution:
  • On disburse action, let the user modify the valid from dates for AIR:
    • Valid from 15.01.2021 Fixed Interest Rate with 10% interest rate
    • Valid from 15.01.2023 Index Interest Rate with 5% interest spread

API details

The Index Rate Sources entity in the v2 API is used to define the type of interest rate used for a specific period in the duration of the loan. This parameter is also visible in the response payload for GET loan accounts by ID:

"interestSettings": {
    "accountInterestRateSettings": [
      {
        "encodedKey": "string",
        "indexSourceKey": "string",
        "interestRate": 0,
        "interestRateCeilingValue": 0,
        "interestRateFloorValue": 0,
        "interestRateReviewCount": 0,
        "interestRateReviewUnit": "DAYS",
        "interestRateSource": "FIXED_INTEREST_RATE",
        "interestSpread": 0,
        "validFrom": "2016-09-06T13:37:50+03:00"
      }

Migrating non-AIR products to AIR products

You can migrate non-AIR products to AIR products. This can be done in the UI or via a PUT/PATCH call to the loan product.

Important

The PUT/PATCH call should only perform the steps that are strictly necessary for the migration, in other words, the step of moving the interestRateSource and interestRate from indexRateSettings to interestRateSettings. Any additional adjustments such as changing the interest rate or adding another source should be done via a separate PUT/PATCH call.


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