In principle, a so-called cap loan is a loan in which the interest is not fixed but variable. The interest cap represents a kind of security for the borrower, which is intended to contain the risk that could result from possibly rising interest rates. The cap loan is primarily used for real estate financing, the borrower has to pay a cap premium.
A loan with variable interest rates means that the interest rate is adjusted to a certain reference interest rate either monthly, quarterly or semi-annually – this is usually the lender bank: if the interest increases, the interest rate on the loan increases, the interest rate falls, the benefit is passed on to the borrower as well. The interest rate cap prevents the interest rate on the loan from rising above a certain set limit, even if the lender bank has risen to this extent.
Where exactly the upper limit of interest is set depends primarily on the term: the longer the loan is taken out, the higher the cap is set. However, it is possible to convert the cap loan into a fixed rate loan.
Cap loans and special repayments
Special repayments provide the borrower with additional flexibility, and even with cap loans special repayments are usually provided for or can be agreed with the bank, even without additional costs, especially if the special repayments are made when the interest rate adjustments are made. This is an advantage because it allows the borrower to bypass any high-interest rate phase and repay the loan early without having to pay a prepayment penalty.
Flexible special repayments
In particular for the interest cap, but also for particularly flexible special repayments, the borrower has to pay a kind of insurance premium, so he pays a premium on the loan interest rate that is normally applied – the amount of the premium can be quite large , because it depends on the interest rate difference at the interest rate cap and the term of the floating rate real estate loan.
Conclusion: A cap loan minimizes the risk that exists with loans with variable interest rates, it is primarily aimed at borrowers who can more or less expect to have the means to repay the loan in the foreseeable future. Unfortunately, a financing comparison for cap loans is rather difficult, since many different factors, such as the possibility of making special repayments, adjustment dates, the upper limit of interest and the interest conditions, must be taken into account in the comparison.