Revisable rate and variable rate
The variable rate loan is a credit whose interest rate may fluctuate depending on the conditions of the financial markets or the terms of a loan or issue agreement. These variations may change up or down. Generally, the rate revision is done once a year. To redefine the rate of their variable rate loans, the lending institutions are based on the Euribor (Euro Interbank Offered Rate), a benchmark index for the euro area. Thanks to this index, the rate is recalculated.
At this new figure, banks will add a margin of 1% to 3%. This margin is calculated according to the situation of the borrower. The adjustable rate loan is therefore directly dependent on the evolution of the money market and these subscribers.
Advantages and disadvantages of a floating rate loan
The main advantage of a variable rate loan is precisely the interest rate. It will generally be lower than fixed rate loans. Since it is revisable each year, banks do not need to protect themselves from a possible rate hike. In addition, if the Euribor benchmark index announces a decline, the rate will also fall.
It is also possible to make an early repayment, an operation that can be particularly interesting when the rates of the current year are low. As for the margins allowed by banks, the more the borrower will provide collateral the lower the margins taken.
However, subject to market fluctuations, variable rate credit is more risky. The borrower must be able to face higher monthly payments if rates rise. This type of credit is therefore rather advisable for short periods of time and for the purchase of a second home rather than a principal residence. To mitigate this risk, it is still possible to easily convert its adjustable rate loan into a fixed rate loan, this mention must be established in the contract of departure.
Variable Rate Loan Purchase to Settle
Floating rate credit involves significant risks. It is therefore quite possible to put an end to the variable rate to start again on a fixed rate by renegotiating with his bank in function or by carrying out a repurchase of mortgage with a specialized broker. If the borrower has several immo or conso credit, he can ask to renegotiate his variable rate loans in a single loan at a fixed rate with a single fixed monthly payment and a repayment period consistent with his budget.
Prepayment fees may be included in this type of loan, depending on the terms and conditions set out at the time of the subscription of the credit agreement.
What is a capped loan?
For added security, there is a capped version of the variable rate loan. This is a ceiling defined at the signing of the contract that will not exceed a certain percentage threshold and therefore a certain amount of monthly payment. A starting rate likely to evolve with limits is thus defined beforehand, which allows to have a certain security in the variation of the rates, but also to deprive oneself of benefiting from possible sharp declines.