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I have a loan on my house, about 250.000€, to be paid within 30 years. I've an interest rate of EURIBOR + 1,25%.

Now, to get additional insurance, I'm buying an interest rate cap at 6,5% for about 1500€ once, for the next 20 years. That makes me feel safe, since I'm quite sure I can always pay back 6,5% and thus will never have to sell the house.

My question is: Isn't 1500€ kind of cheap for this kind of safety? Note also, that the same cap at 5% is already significantly more expensive, about 8000€.

In other words, the market seems to think that it is really kind of unlikely, that the EURIBOR will raise that high.

  • The questions doesn’t specify a country, but don’t you have an option of a 30 year fixed rate? That might be worth more to you if you are risk averse. – ssn Mar 29 '18 at 11:44
  • If you want to ensure that you never pay more than 6.5, then you need a cap of 5.25, since your mortgage is EURIBOR + 1.25. – D Stanley Mar 29 '18 at 13:10
  • No idea whether this could be the happen, but lenders have been known to be sneaky... you say the mortgage is for 30 years, and you're buying a cap for 20 years. Just make sure that if interest rates do rise above 6.5%, the "cap" isn't just some kind of "deferral" mechanism, and you'll end up paying heavily in the last 10 years to cover what you would have paid without the cap. – TripeHound Mar 29 '18 at 15:17
  • @DStanley I would have ass.u.me.d that 6.5% is a cap on the rate the OP is charged, not on the rate that is used to set that rate. – TripeHound Mar 29 '18 at 15:20
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In other words, the market seems to think that it is really kind of unlikely, that the EURIBOR will raise that high.

Yes, they do.

If you think it is likely that it will go above, or are very concerned about the risk of doing so, then it may seem worth it to you.

However, that is a very high increase on where we are now. Return to higher interest rates shows no sign of being a quick process. If you can "always pay back at 6.5%", then you presumably could overpay now (and reduce your debt if the rate went up). 1500€ is a lot of money if it gains you nothing.

Only you can decide if it is worth it for you, but it doesn't seem to be "really cheap".

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Isn't 1500€ kind of cheap for this kind of safety?

This is opinion based. If you feel the price is right, go for it.

the market seems to think that it is really kind of unlikely, that the EURIBOR will raise that high.

Yes that is right, hence it reflects a lower premium that you need to pay. It may still be cheaper [if the products are available] for a cap of say 8%.

Generally for developed economies the Bank Rates are in the range of few percentages. The EURIBOR is near zero now and may harden in few years, which is again a topic of economics and less of personal finance. Historically the high was around 4.8 - 5% around 2006-2008 period. Thus is it very unlikely for EURIBOR to reach 6.5% ...

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