Insurance rate are policies whose function is to cover the volatility of interest rate variable rate. The vehicles through which the financial institutions instrumentalist these types of insurance are the following financial derivatives:
Or financial swaps: their function is to cover the risk of rising interest rates. A fixed amount and a fixed rate (the value for which we do not want to raise our interest) is established, if interest rates fall the customer assumes the cost of the difference and if interest rates go up the client has covered the difference type.
Swaps and ground clauses: bad combination
The clauses soil are those that limit the lowering of the variable rate on a mortgage loan. That is, if you have a mortgage to Euribor + 0.70 and a floor of 3%, if when revising the Euribor is 1.2% have an interest rate of 1.9%, but having clause down 3% interest should be calculated on the basis of 3%, which is the minimum that you apply the entity.
So if we have a swap and a clause of soil and euribor has a downtrend, we must pay the bank the difference for the swap. In addition, the share of the mortgage will not benefit.
Example of the CAPs
CAPs are that the customer pays a premium to cover increases in the interest rate.
Suppose you have a mortgage to Euribor + 0.75 and hired a 4% CAP. The bank will pay a premium to ensure a maximum interest.
If the euribor rises in the review of the mortgage and has a value of 4%, as our interest is 4.75% the bank will assume the difference of interest of 4% to 4.75%, depending on the value of the premium that we had paid offset the assumed expenditure.
If in reviewing the euribor is reduced and has a value of 2%, our interest will be 2.75%, as does not exceed the maximum that look not assume any other costs (only the premium initially had already paid).
This is insurance that is interesting hire when we want stability and not worry about high increases in Euribor. We must bear in mind the difference between a PDA and a swap before hiring one of the two insurance.