In the case of a long loan, as for a mortgage, it is strongly recommended to choose the best interest rate to optimize your financing. But did you know that there are three types of interest rates that can be applied to this credit? The fixed-rate, the variable rate, and the “capped” variable rate. Presentation.
The fixed interest rate, the benchmark for real estate
As the name suggests, the fixed interest rate remains the same for the duration of the mortgage. In fact, your monthly payments will also remain the same, unless you opt for a partial prepayment or if you renegotiate the terms of the current loan.
This option offers the borrower a certain comfort since it provides total visibility on the credit taken out (total cost, amount of installments), it also protects it against any increase in the rate. And if it were to fall, the borrower would remain free to attempt a renegotiation in his bank or a buyout by another.
The variable interest rate for fairer but riskier credit
The exact opposite of the “fixed” option, the variable interest rate adapts throughout the contract, according to the evolution of a given, taken as a standard, the Euribor rate. The latter is the result of the daily average of lender rates over 13 maturities (after excluding 15% of the extreme quotes). It is published every morning at 11 a.m.
Constantly revised, the interest rate can vary upward or downward throughout the mortgage. In fact, the borrower cannot know either the total cost of the loan or the amount of all its maturities at the time of signing the offer.
If the borrower can take advantage of the interest rate reductions (directly visible on his monthly payments), he can suffer the increases just as much, making this type of subscription riskier!
The variable interest rate “capped”, the in-between!
The middle solution could be to favor the variable, but “capped” interest rate! In other words, the borrower can freely benefit from the rate reductions passed on to their maturities, but the increase can never exceed a certain rate. Note that the decline may also be limited (“floored”).
Generally, the rate is capped at +/- 1% of the initial fixed rate. For example, if at the time of signing, the fixed rate is 2%, it cannot go beyond 3%.
In this specific case, if the borrower does not know the total amount of his mortgage at the time of subscription, he nevertheless limits the risks of too large an upward variation in rates.
To correctly measure the impact of such a choice, do not hesitate to seek the advice of an expert, because a mortgage is traditionally signed over 20, 25 or even 30 years … The free broker Good Credit will be happy to enlighten you on your options and their consequences: ask to be called back to build your project serenely!