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The capped rates apply to variable or adjustable rate loans. Indeed, by definition and unlike a fixed rate, their rate is likely to fall or fly and thus make credit expensive. To limit these potential increases, the capped rates were put in place. How do they work?

The operation of the captioned rate

In the case of a cap rate, the overall change in the interest rate of the floating rate is limited by a cap or a cap. Which restricts it upward or downward. There are, however, capped rates which are only limited upwards.
In general variable rates are capped at + 1, 2 or 3 points and - 1, 2 or 3 points. Their operation is simple. By way of example: for a 1 point cap and a 3.5% variable starting rate: the rate will be at most 4.5% (3.5% + 1) in case of a rise in the rate and at minimum 2.5% (3.5% - 1) if the rate falls.
Similarly, a loan with a rate of 3.5% cap + 2 / -2 is a loan whose interest rate can vary between 1.5% and 5.5%. It should be noted that the higher the cap, the lower the basic credit rate. The opposite is also true.

The benefits of the rate capped

Although the base rate of the capped variable rate loan is higher than that of the conventional floating rate loan, it offers the possibility of calculating the maximum amount and the minimum amount of monthly payments to be repaid.

This device thus secures all offers of variable rate credit. And especially long-term loans, logically more exposed to rising rates.
As the capped rate, it will be understood, is an interesting variant of the variable rate loan here are some generalities on the latter. His interest rate is periodically revised, generally every year on the anniversary date of your contract, based on the evolution of a benchmark.
This index is often the Euribor, which is the price at which banks lend money in the short term on the money market (3, 6 or 12 months).

To know: The advantage of this kind of loan? A lower starting rate than a fixed rate loan. However, provided this is expressly provided for in the loan agreement, you can replace a variable rate with a fixed rate. But to avoid the expense of this change, you have to renegotiate a new contract with the bank. Hence the importance to attach to the initial contract.

Video Instruction: Capped rate home loans