The cap loan as a short-term form of financing.
If you need a loan and want to benefit from low interest rates, you can apply for a so-called cap loan. This type of loan does not have a fixed interest rate, which leads to greater flexibility but also harbors risks. A cap loan is not suitable for long-term financing, but only for relatively short interim financing.
Interest rate fixing for the borrowing rate waived.
The interest rate is set again and again during the term of the loan, for example on the basis of the Cream Bank reference interest rate (Cream Bank Offered Rate) used in interbank business at regular intervals of 3 or 6 months. The lender usually charges between 1 and 2% on the reference interest rate.
In addition, upon completion (called cap) of a cap loan agreement for a period of between 3 and 15 years an interest rate ceiling on request a lower interest rate limit (as a floor) are set. The interest rate must not exceed or fall below these two limits during the agreed term.
If you want even more security, you can agree with the lender that the cap loan will be converted into an interest-linked loan as soon as the interest rate cap is exceeded. This prevents the borrower from falling into an interest rate trap.
Fixed-rate loans hold certain risks, so there are advantages that should not be underestimated:
- High flexibility
- Higher profit due to falling interest rates
- The bank does not charge prepayment penalty for early repayment
- Short notice period (usually 3 months).
However, in order to be able to make use of the advantages mentioned, it is necessary to have a sound knowledge of the financial markets and the associated interest rate policy. It also makes sense to keep an eye on the interest rate level and the activities of the central banks, because they set the Cream Bank interest rate and thus have an influence on the interest rate on the cap loan that should not be underestimated.
The applicant’s creditworthiness is usually much more precise than would be the case with a fixed-interest loan. This is to ensure that, in an emergency, the borrower has the necessary funds to repay the loan early.
Repay the loan. If you want to buy or build a property and need a loan for it, you should definitely choose a different form of loan.