Also known as a cap rate credit , this form of loan defines a ceiling that can not be exceeded during the term of the loan , regardless of rate increases. …
Also known as a cap rate credit , this form of loan defines a ceiling that can not be exceeded during the term of the loan , regardless of rate increases. This upper limit is interesting for long-term loans where the variation in interest rates can vary significantly. Some offers are accompanied by a floor rate applicable in the event of a drop in rates. In all cases, these variable values must be clearly specified in the preliminary offer, as must the reference rate and possibly the floor rate. By definition, the capped rate is attractive when the trend in rates is rising or may rise quickly. If it is then possible to convert a variable rate loan into a fixed rate, this operation entails costs that must be taken into account in the calculation of the final cost.
Why choose a capped credit
Before choosing a type of credit, it is important to look at the rate trend. That’s what Thomas does by spending hours on the Internet before making up his mind. Fixed or variable rate, that was the question he asked himself. If currently the rates are very low, they can go up very quickly. Opting for a capped rate loan provides security in the event of a sharp rise. By adding a floor rate, it can also benefit from a possible additional drop. With a fixed rate credit, no increase or decrease in interest rates, but maturities whose amount is known in advance. Aided by his comparator, Thomas multiplies the simulations to find the best solution, which will then allow him to definitely fix his choice.
Variable rate loan and a fixed rate credit
Eugene finally chose the first solution. If the fixed rate provides some peace of mind by eliminating any variation, the base rate is significantly higher. With a capped rate loan , it limits the effects of a possible increase while benefiting from an attractive base rate. The monthly payments of the first years of a loan being mainly made up of interests, a few tenths of points less allow interesting savings. It is this aspect that has tilted the balance in the case of Eugene, the capped side of credit ensuring a certain security.