Mortgage with interest rate ceiling – How it worksOn August 6, 2019 by Carol Miller
Choosing whether to have fixed or variable interest rates is not the easiest. The variable has the advantage that it will usually be the cheapest, but at the same time you take a risk as the interest rate can rise sharply. Fixed interest rates are often more expensive, but at the same time you know exactly what the loan will cost throughout the period, regardless of what happens to the interest rates.
An alternative to this could then be a mortgage loan with an interest rate cap.
If you choose this, it simply works so that your loan becomes a mortgage with a variable interest rate. The interest rate you have on the loan will vary as the usual floating rate does.
However, there is a stop at a certain interest rate.
If the variable interest rate goes above this level, you will still be able to pay the interest previously agreed as the maximum interest rate for your loan. Usually, this interest rate ceiling applies for between 3 and 5 years.
For this, you have to pay a certain amount, since that is the question of a type of insurance. It will be an extra security for you just as fixed interest rates would be, though instead of determining the same interest rate for the entire term, you instead have a ceiling that you cannot go over.
As mentioned, it is a type of insurance that prevents the interest rate from pulling away too much.
You have to decide if it feels safer with such a roof and if it is worth paying a little extra for that security. You are sure of substantial increases in interest rates, but as mentioned, you get a small extra cost instead.
So think about whether it’s worth it or not. Is the interest rate situation uncertain or do you think you will be able to see larger increases in interest rates in the future? Then maybe it is worth getting this extra security. If the situation seems very stable and you are not so worried, you might skip it instead.