Mortgages with floating rate with CAP summarize some advantages of the flexibility of variable rates with some of the benefits of the fixed rate. Loans at variable rates are in fact characterized by an interest that changes over the duration of the loan or mortgage, following the trend of some international rates used by the banks as a reference. These rates are usually the ECB rate, set by the European Central Bank, or the Euribor, established by the European Banking Federation. Both provide an indication of the costs that banks face to finance themselves: for this reason they use them to establish their own remuneration when they grant loans to their customers.
The main advantage of the variable rate mortgage
Especially in this historical moment in which international rates have been at historic lows for years, is that the cost of the loan could be lower than that deriving from a fixed rate. However, to understand if this rate with CAP is convenient, we must consider the risk that during the duration of the loan the rates will increase and therefore also the interest to be paid, without the user being able to do anything about it.
What then is the CAP mortgage? This is a solution to protect yourself against these upward fluctuations, setting a maximum threshold above which the interest rate cannot rise (the CAP, in fact). This means that below that threshold, the rate will vary, following the trend of the reference rate, but if these should go above the CAP, you will instead enjoy the advantages of a fixed rate: you will therefore know exactly how much will be the maximum amount of the installment.
However, this increased security on the interest payable has costs
First of all, if you choose this option, the bank will request a higher spread payment. The spread is the difference between the reference rate and that actually paid to the bank: it is therefore the credit institution’s earnings. Since the bank renounces rates higher than the maximum threshold, it requires however a higher remuneration from the customer. Moreover, it could also include a FLOOR in the contract, ie a minimum threshold below which the rate paid can never go down: considering that today international rates are really low, it could be a counterproductive measure for the user.
Choosing a variable rate with CAP therefore means being aware of the risks associated with variable rates and trying to protect yourself against any excessive increases : however, you must carefully consider the additional costs.