With a fixed rate loan, you know the cost of your mortgage and the amount of monthly payments you have to make over the life of your loan. On the other hand, with a variable rate , you can not know in advance what your loan will cost you since its rate will change during the loan according to the variation of the benchmark index (Euribor or Tibor in general). As a result, your monthly payment or the duration of your loan may be increased or decreased depending on the evolution of the rates. Generally, floating rate loans offer a more attractive starting rate than fixed rate loans.
The classic variable rate
It is a little protective loan in case of sharp rise in rates. Changes in rates, which are inevitable during the loan, are reflected in totality, either on the monthly payment or on the duration of the loan.
If repercussions on the duration: If the rate increases, the monthly payment remains the same, it is the repayment period that extends, sometimes within the limit of 5 years. Conversely, if the rate falls, the monthly payment does not move, but the credit period decreases. If repercussions on the monthly payment: If the rate increases, the repercussion applies on the monthly payment, according to the ceilings determined in the loan offer. Conversely, if a rate decrease occurs, the monthly payment varies proportionally with the decrease. The change in the declining rate is generally unlimited, which makes it possible to take maximum advantage of the rate cuts that may apply to credit.
Variable rate capped or caped
For more security, always opt for capped variable rates called “capped”. There are three types of capped variable rate loans, with the main differences being: the ceiling rate (rate cap), the index, the duration and the date of variation of the rate. The capped variable rate is more protective than a traditional variable since the ceiling rate is known from the outset which limits the effects of rate increases, while passing on the decreases.
A “capped 1” variable rate means that the 3% rate announced over 20 years can never exceed 4%, regardless of the increases recorded. So you know how much you will have to pay each month. • If rates fall: When rates vary, it is primarily the duration of the credit that is impacted. If rates go down, there is no downward direction and the term of credit decreases without a floor. • If rate increase: There are 3 security modes: – Rate ceiling. – Duration limit: the extension of the loan term is generally limited to a maximum duration. – Ceiling of the monthly payment.
The loan offer includes all the information relating to the variable rate
It provides for the delivery of a schedule (or repayment plan) that allows you to know all the key figures of your credit. The loan offer is accompanied by an information notice containing the terms and conditions of the change in the interest rate. It also includes a simulation of the impact of a rate change on monthly payments, the loan term and the total cost of credit. This simulation is not a commitment of the bank, it is simply an information note. Moreover, in the context of a variable rate , the lending institution is obliged to inform the borrower once a year of the amount of outstanding capital to be repaid.