Interest rate protection on a mortgage loan, for example in the form of an interest rate tube or an interest rate cap, is already applied for every other mortgage loan. Long periods of low interest rates have made consumers realize that this situation cannot last forever. That is why most people have chosen to secure their mortgage interest rates in different ways: this is also called interest rate hedging.
The interest rate tube is a popular way to hedge loans against rising interest rates. The interest rate tube sets the upper and lower bounds of the credit rate between which the reference rate of the loan can move freely. Currently, only Nordea and Danske Bank offer these interest rate mortgages in Finland, but it is noteworthy that in the latter case up to half of the mortgage borrowers have recently opted for the interest rate loan.
If you are looking for a loan in a broader sense, in addition to different types of interest rate hedges, it is also good to compare the interest rates of different loans to find the most suitable option for you. For example, you can easily compare unsecured consumer loans in our loan comparison:
Interest rate hedges in comparison
We investigated the interest rate hedges of mortgages and their differences, and provided tips for borrowers to choose the most suitable loan.
The interest rate tube sets the maximum and minimum amount of the mortgage reference rate above or below which the interest rate cannot rise or fall. These interest rate limits form a tube in which the reference rate can move freely without, however, exceeding these minimum and maximum rates. As a result, the 12-month Euribor most often acts as a reference rate for these loans. In addition, since so few banks still offer the interest rate tube, it is difficult to make any general assumptions about the length of the loan period or the amount of credit: For example, Nordea offers an interest rate tube with a minimum loan term of € 10,000.
The interest rate tube provides security for changes in the reference rate, as the rate can never rise above the allowed ceiling. So you never have to worry about rising interest rates, and you can sleep better at night. Another positive aspect of the interest rate pipeline is that it can be obtained at no extra cost. This is largely due to the fact that reference rates cannot fall below the minimum pipe limit. As a result, banks have less risk of losing money due to interest rate fluctuations compared to, for example, the interest rate ceiling, which also allows them to afford the interest rate tube free of charge.
The downside to the interest rate pipeline is that the loan rate always has a minimum level below which it cannot go. This means that when the benchmark interest rate falls below the minimum level, you will no longer be able to benefit from the lower interest rate.
The interest rate cap
The interest rate cap sets a ceiling for the mortgage reference rate above which interest rates cannot rise. In addition, the 12-month Euribor is often used as a reference rate for a loan, so in this respect the interest rate protection is very similar to an interest rate tube. However, the significant difference with the previous one is that there is no lower limit on the interest rate ceiling, so you can take full advantage of lowering the interest rate. On the other hand, because of this, the roof is often not free as banks, for example, run the risk of turning the reference rate into a negative one, which would mean losing money.
As the name implies, the reference rate will remain at the same level throughout the life of the loan. In this respect, it is the most stable way in the market to hedge against interest rate changes, as the next month’s loan amount is always known to the borrower. It is also possible to take a fixed interest rate, for example, on one half of the loan amount and tie the other half to the Euribor. Later this fixed rate can also be replaced by an interest rate tube or ceiling as the situation changes.
What is the best way to hedge interest rates?
As you might expect, there is no unambiguous answer to this question, as the best option for yourself depends on your own attitude to both risks and interest rate fluctuations. For example, dramatic fluctuations. Thus, such an option is well suited for a risk-free person.
If you are prepared to take a little more risk with interest rate volatility, you may consider choosing either an interest rate cap or a tube to hedge interest rate volatility. Which of these two is ultimately more appropriate for you may depend, for example, on your willingness to pay for interest rate protection. Because, as we have said before, interest rate caps are almost always subject to charges because they involve greater risks for banks. The interest rate tube, on the other hand, may be free of charge, as the minimum interest rate cap will protect banks from large losses in returns. On the other hand, the consumer cannot benefit from a potential fall in interest rates.
If in addition to the purchase of an apartment, for example, the renovation Making or buying a car becomes relevant, then you should first compare different financing options before a final purchase decision. For example, in our loan comparison, you can try to compare different types of unsecured consumer loans: