If you want to hedge against interest rate hikes and give your finances a better stability, it may be advantageous to take advantage of a loan with interest rate ceilings.
At present, interest rates are low, but if one day it turns and interest rates start to rise again, you may suddenly face a larger monthly expense that will eventually affect your availability.
An interest rate ceiling protects you from interest rate hikes
For the last long time, interest rates have been at a historically low level due to the global economic situation. The Danish interest rate is determined by Danmarks Nationalbank, which adjusts it according to the European Central Bank in order to ensure interest rates.
If the global economic situation changes at some point and interest rates begin to rise, the interest rate ceiling will ensure that the monthly payments on the loan do not increase as well.
The alternative to an interest rate ceiling
If you do not have an interest rate ceiling on your loan, it will instead be a variable interest rate. With a variable loan, the interest rate will be adjusted continuously.
In this way, there is a greater risk of having a higher monthly expenditure over time, which can damage your personal finances if the extra expense cannot be afforded.
You should be aware of that
Before you take out a loan with interest rate ceilings, or get your current loan with a variable interest rate rescheduled, there are certain things you should be aware of.
A loan with an interest rate ceiling is not free to establish and you would have to pay an extra benefit to have the loan. You can consider the loan as an insurance policy so that your personal finances are not squeezed further by any interest rate hike, but there will still be a deductible for the loan, which must be paid at the end of each year in which you repay the loan. Therefore, you must be aware of the rate of interest loan you wish to raise before you take out the loan. If the rate is too high, the loan becomes too expensive and you will face the same situation as if you had a variable rate loan.
What does the interest rate on an interest rate ceiling depend on?
How high the interest rate is on a loan with an interest rate ceiling depends on various factors.
This can be both depending on how big the loan is and how long the loan has to be repaid over.
The more you want to borrow and the longer you want to repay over, the higher the interest rate ceiling will also be, as the lender must lend more money and wait for a longer period before the loan is repaid.
When does it pay to have a loan with interest rate ceiling?
In order to pay off a loan with an interest rate ceiling, the interest rate must preferably be below 5%. If it is above this level of interest, you will most often not be able to get anything out of having an interest rate cap, as the annual cost of having the loan will be too high under a variable rate loan.
A loan with a interest rate ceiling will always be a good insurance policy for you and your personal finances during periods of fluctuating interest rates, as this will give you a guarantee of how much your expenses will increase to the maximum. In this way, you get a greater security in your daily life, and avoid excessive costs of an interest rate that increases too much and that the monthly expenses become obscure.
The disadvantage of an interest rate ceiling
While an interest rate cap may be a really good idea, there are also downsides to this type of loan.
When your loan follows the low interest rate and cannot get over the agreed interest rate, you still pay the same annual excess payment, for this insurance. So, if the loan does not reach the agreed rate, you will still have to pay the same benefit for a security that you do not use.