Abstract :
[en] The annual percentage rate of charge (APRC) designed to reflect all costs of borrowing is a widely used measure to compare different credit products. It disregards completely, however, risks of possible future changes in interest and exchange rates. As an unintended consequence of the general advice to minimize APRC, many borrowers take adjustable-rate mortgages with extremely short interest rate period or foreign currency denominated loans and run into an excessive risk without really being aware of it. To avoid this, we propose a new, risk-adjusted APRC incorporating also the potential costs of risk hedging. This new measure eliminates most of the virtual advantages of riskier structures and reduces the danger of excessive risk-taking. As an illustration, we analyze the latest Hungarian home loan trends with the help of scenario analysis.
Funding text :
Edina Berlinger is a professor of finance and the chair of the Finance Department at Corvinus University of Budapest. She obtained her Ph. D. degree from the Corvinus University of Budapest in 2004 related to the design and implementation of income-contingent student loan systems. She participated in several research and consultancy projects in the fields of banking, risk management, asset pricing, and complex systems. At the moment, she leads two parallel research projects: social innovation for financial inclusion (supported by the Higher Education Institutional Excellence Program of the Ministry of Human Capacities) and the role of the state in the design and operation of credit systems (supported by the Bolyai János Program of the Hungarian Academy of Sciences). This paper is linked directly to the latter but has implications on the first one, too.
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