Stepped margin
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For loans with longer maturities, the margin may be increased in stages during the term of the loan.
For example, an eight-year loan could carry a stepped margin as follows:
- EURIBOR + 40 basis points p.a. for the first four years;
- EURIBOR + 50 basis points p.a. for the next two years; and
- EURIBOR + 60 basis points p.a. for the final two years.
This type of structure is designed to reflect increased credit risk with the passage of time
and the expected future credit conditions.
However, the logic is somewhat dubious since
by the time the higher margin comes into effect the remaining life of the loan will be
relatively short.
In practice, stepped margins tend to encourage prepayment and renegotiation or refinancing of the loan.
