While the fixed-rate mortgage remains the type of loan chosen by the majority of borrowers, they are still 20% to opt for a revolving rate credit. What are the advantages of this type of loan and what are the limits? The point on the revisable real estate rate.
What you need to know about the revisable rate
Unlike the fixed rate, the revisable rate is likely to be modulated during the life of the mortgage , and can therefore be revised downwards as well as upwards. The borrower can benefit from an advantageous development for his mortgage, but may also have to bear an increase in the interest rate.
Due to the uncertainty that weighs on the evolution of the rate of the mortgage, the borrower must be able to anticipate a possible increase of the rate, and especially to support it in order to continue to ensure the repayment of the monthly payments .
The rates are indeed revised regularly , as a rule on the anniversary date, from the benchmark.
This benchmark is most of the time the Euribor, ie the average rate used by European banks when they lend money.
To this benchmark is then added a margin of 1 to 2%, adjusted according to the profile of the borrower.
The benefits of adjustable rate loans
Among the major advantages of adjustable rate real estate loans is the fact that they can benefit from a lower starting rate than that offered by banks in the case of a fixed rate loan; this difference is generally between 1 and 3 points.
On the other hand, depending on the fluctuations of the financial market, it is possible to take advantage of interest rate cuts, and thus advantageous loan conditions.
In addition, this type of credit allows for early repayment without having to pay penalties, as is generally the case for fixed rate loans.
There are a number of arrangements put in place to allow the borrower to protect himself from the potential risks associated with a significant rise in the interest rate. It is thus possible to opt for a capped adjustable rate, in other words a capped adjustable rate. Increases and decreases can not in this case exceed the limits previously determined between the bank and the customer.
It is also useful to know that the vast majority of adjustable rate loans can be converted into fixed rate loans,
This provides some security for a borrower who would be unable to cope with an excessive increase in the interest rate of his home loan.
Another alternative to guard against a sudden and excessive rise in the interest rate is to include a clause in the contract providing for a ceiling on monthly payments in the event that the rate increase is too high.