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Interest rate cap
An interest rate cap offers effective protection against rising interest rates, while retaining the opportunity to benefit from falling interest rates.
Effective protection against rising interest rates
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.
Limit the interest rate risk of a loan with an interest rate cap
While an interest rate swap fixes the interest on a loan, an interest rate cap can be used to limit the interest rate risk of a loan to a certain maximum level.
The cancellation of an interest rate cap will never cause any cancellation costs to the customer, unlike the cancellation of an interest rate swap. The maximum loss is the premium paid by the customer - if interest rates fall, the worst-case scenario is that the hedge has no value.
Terms and conditions
Purchasing the products requires a customer relationship and a general agreement on derivatives with Nordea. Please contact our specialists for further information. We will be happy to help.