The financial support of a bank pays for itself. To remunerate itself, the establishment will in fact increase the amount lent by an amount expressed as a percentage. This is the famous interest rate. But be careful, because there are different techniques to calculate it.
The fixed rate, the security card
To play it safe, most homeowners opt for a fixed rate loan. It is determined when signing the loan and for the entire duration of the contract, without ever being able to change. The great advantage is to know, from the start, the total cost of the loan and the amount of repayments, without undergoing fluctuation in monthly payments. It is a good way to protect against a possible rise in prices, which makes it the benchmark in mortgage credit.
If this solution is obvious in a context of low interest rates, it can however be penalizing if you take out the loan while the interest rates are high, as was the case in 2000 (between 5 and 6%) or in 2012 (4.3%). At the first significant drop in the market, you have to renegotiate your credit or have it redeemed.
The variable rate, the unknown
Some borrowers may, conversely, be seduced by a variable interest rate, posted at a lower level than the fixed rate. This is also the main argument of the promoters of this solution, to which is added the prospect of being able to benefit directly from market declines, without incurring the costs associated with a loan buyback. In practice, the variable rate is fixed in relation to a benchmark index and changes with it throughout the contract. Its amount is therefore revised each year. Most often, banks opt for Euribor, which is widely used in the euro money market, but less widespread indices are also possible.
This is a leap into the unknown, since you do not know in advance the total cost of your credit, even though the latter can commit you over twenty years. It is therefore a risky bet because, as the Ministry of the Economy emphasizes, "a variable rate loan can turn out to be a formidable trap, if rates rise". This solution is only possible in a context of very high fixed rates and when there is a significant difference with the variable rate, since you can then anticipate a future drop in prices.
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The capped rate, to limit the risk
If you decide to opt for a variable rate loan, which can be interesting for a short-term loan, it is essential to limit the risk of a rise in the rate as much as possible. This is the objective of the so-called “capped” rate. In this context, the amount of monthly payments can always change, upward or downward, but only within a certain limit determined when the contract is taken out. As a general rule, this cap varies between 1 and 2 points. Clearly, if you have opted for a variable rate loan of 2.5% capped at 1, this means that the interest rate will not be able to increase beyond 3.5% or decrease below 1.5. %.
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