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Interest rate caps give borrowers the best of both worlds: the freedom to benefit when interest rates are low, combined with protection against interest rates rising above an agreed level.
Larger businesses have long been able to purchase caps. Now, thanks to Cap-It, that same peace of mind is available to smaller borrowers too.
Interest rate caps
Interest rate caps give borrowers the peace of mind that comes from knowing they have the best of both worlds: they are free to enjoy low payments when interest rates are low, but also protected in case interest rates rise above an agreed level.
A cap can be viewed as insurance for a borrower having a variable rate loan or loans. If interest rates rise above the agreed cap rate, then the borrower receives compensating payments under the cap, keeping their net interest costs below the agreed maximum.
Interest rate caps are premium products which are simple, flexible and free from the hidden risks of fixed rate instruments. A cap is not tied to any given loan and may be terminated without penalty. A single cap can protect a pool of underlying borrowings for a period of up to ten years.
The financial advantages which caps provide have been available to larger businesses for many years. But lenders have traditionally been reluctant to offer interest rate caps to smaller borrowers. If they will offer caps at all, the prices tend to be considerably above normal market levels.
Cap-It Issuer Limited (‘Cap-It’) was established to offer the benefits of caps to small and medium-sized borrowers at transparent, affordable prices. To see how Cap-It could help you, please read on.
When interest rates rise above the agreed cap rate, you will receive compensating payments under the cap, meaning that your interest costs, net of the cap reimbursements, can never be higher than the agreed maximum.
A cap does not lock you into a fixed minimum rate of interest. When interest rates are below the cap rate, you are free to enjoy those low interest rates and to benefit from reduced monthly payments accordingly.
With an interest rate cap you are more attractive to lenders, because there is less risk that you will be unable to meet loan payments when interest rates rise. The cap payments provide you with extra income when it is most needed.
No hidden traps
Interest rate caps are free from the hidden risks that afflict fixed rate products, which may impair your credit status and expose you to substantial exit costs. Unlike fixed rate contracts, caps can be terminated at any stage without penalty.
Interest rate caps are separate contracts from the borrowings they protect. If you own a cap, you are free to re-organise your loans without having to adjust the cap. Similarly, you can cancel or modify your cap without needing to restructure your borrowings.
You pay an initial premium[/itg-glossary] to buy the interest rate cap. That is the only payment you make. A single cap can provide flexible protection for a pool of borrowings for up to 10 years.
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