Interest rate cap

If you’re worried about interest rate rises, feel free to contact your OP cooperative bank. Together, we’ll map out your situation and wishes. On this basis, we’ll find a suitable solution to ensure that there’s no need to worry about future changes in interest rates.

An interest rate cap will limit your loan’s interest rate costs for the agreed period, and ensure that you can continue repaying the loan principal, even if rates rise.

An interest rate cap is suitable for you if you want to keep your loan’s interest rate risk within certain bounds, but can cope with moderate changes in loan servicing costs.

Other types of protection include a fixed interest rate (for the entire loan term) and a fixed interest period (for an agreed part of the loan term).

A fixed interest rate solution is right for you if you value certainty about the size of regular loan payments and would like to eliminate the loan’s interest rate risk.

You can buy an interest rate cap for a new or old loan. An interest rate cap is worth buying if you want to be certain about your loan’s future interest rate costs. So now is always the right time to get protection.

You can purchase an interest rate cap later, for an existing loan, as long as the remaining loan term is at least as long as your chosen protection period.

To get an interest rate cap for your loan, please contact your OP cooperative bank. 

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The price is based on the chosen protection period and the level of the interest rate cap. It is also affected by market conditions at the time and interest rate forecasts.

An interest rate cap offer is always approximate – the final price will be affected by market conditions and interest rate forecasts. The final level, duration and price are determined when the agreement is made.

You can pay for the interest rate cap with a single payment (premium) at the time of purchase (interest rate cap with single premium), or monthly as part of the loan margin during the interest rate protection period (interest rate cap premium as part of loan margin):

Paying the interest rate cap price as part of the loan margin

Paying for the interest rate cap as part of the loan margin means that the cap fee is included in your regular loan payments. Payments (premiums) for the cap are included in the total interest paid on the loan during the cap’s period of validity. This kind of interest rate cap cannot be cancelled early if the loan is still valid. However, if a loan protected with an interest rate cap is paid off early, the interest rate cap will end and no separate fee will be charged for this.

Paying the interest rate cap price with a single payment (premium)

In this case, the interest rate cap fee is paid in a single payment at the time of purchase. A cap paid for in this way can be ended early, at any time. You can also pay the loan off early, before the interest rate cap ends. If you do this, the interest rate cap will end and the bank will return part of the cap fee, calculated on the basis of the unpaid loan principal and unused protection period. The amount repaid depends on the market price at the time and the size of the original interest rate cap fee.

A loan protected by an interest rate cap is a floating-rate loan with a reference-rate upper limit set for an agreed period. The upper limit enters into force at the time of the interest rate adjustment following agreement on the cap. The additional margin charged due to the interest rate cap takes effect immediately.

If an interest rate cap is purchased for a new loan, the reference rate’s upper limit takes effect upon drawdown of the loan, when the first reference rate value is set.

If an interest rate cap is purchased for an existing loan, the upper limit takes effect on the first interest rate adjustment date after the cap is agreed.

An old interest rate cap can be cancelled if you have paid a single-payment fee (premium) upon making the agreement. You can then agree new interest rate protection, if you wish. 

If you pay the interest rate cap price in instalments, as part of the loan margin, you can change the protection period or the cap’s level at any time during the cap’s period of validity. Cap premiums charged as part of the margin could rise or fall, depending on market conditions and the cap’s protection period and level.

When a loan has an interest rate cap paid in instalments, the total interest includes the:

• Loan margin
• Additional margin on the interest rate cap
• Reference rate or interest rate cap level, depending on which is lowest

When a loan has an interest rate cap with a single-payment premium, the total interest includes the:

• Loan margin
• Reference rate or interest rate cap level, depending on which is lowest

Regular loan payments are based on the total interest rate, repayment of the loan principal, and expenses. The interest period ends on the interest rate adjustment date. If the reference interest rate has risen or fallen since the previous interest rate adjustment, your regular loan payments or loan term may change, depending on your repayment method.

However, the reference rate on a loan protected by an interest rate cap will not rise higher than the upper limit chosen on the interest rate adjustment date. In such a case, the interest rate cap will limit the rise in interest expenses. Depending on the repayment method, the regular loan payment can also decrease on the interest rate adjustment date. This means that you will benefit from lower interest rates.

If your repayment method is variable annuity, your monthly instalment may change when the general interest rates change. This is because the proportion of the repayment of the instalment may also increase so that your loan term remains the same.

So, the change in the instalment is related to your repayment method, meaning that the instalment may increase on the interest rate adjustment date even if your loan has an interest rate cap. However, the instalment of the loan with an interest rate cap does not increase by as much as without the interest rate cap because the interest rate cap limits the rise in interest charges. Your instalment may also decrease if the general interest rates decrease to the level lower than the interest rate cap.

When the instalment amount is calculated again on the interest rate adjustment date, the time after the interest rate protection is also taken into account in the calculation of the proportion of the repayment. In the calculation, the reference interest rate at that time is assumed to correspond to the interest rate level on the interest rate adjustment date.

The advantage of the interest rate cap in the variable annuity loan is that the interest rate cap limits the proportion of interest charges of your instalment. In addition, the loan is paid back within the agreed schedule.