An interest rate cap is an option with which the buyer ensures that the interest paid on a loan will not exceed the agreed limit. The buyer pays a premium for this hedge.
The price of the interest rate cap depends on the duration of the hedge, the capital of the hedged loan, interest rate fluctuations and the opted interest rate cap level.
An interest rate cap offers effective protection against rising interest rates, while retaining the opportunity to benefit from falling interest rates.
The customer will know the maximum interest rate level at all times, which makes it easier to budget the financing contributions.
Interests can rise from their current levels (the protection will not activate before the cap is reached).
The cost charged for the cap is a premium paid in advance as a single payment or in instalments.
Early cancellation of the contract will always be based on the market price, meaning that one of the parties must compensate the other. The value of an interest rate cap paid in instalments may be negative for the customer.