While the European Central Bank has decided to drastically raise its key rates, the variable rate loan is reappearing in the credit environment, Wealth A7 explains it all to you:

What is a capped variable rate loan?

The French credit as we know it is rather fixed, because it allows to know and to foresee each monthly payment. The capped variable rate credit can vary according to an index while being limited. For example, a credit with a rate of 1.5% capped at +1 or -1 will be able to see its rate vary between 0.5% and 2.5%.

In principle, variable rate loans are indexed to the Euribor (Euro Interbank Offered Rate). In concrete terms, if the index rises, the rate will increase and vice versa.

And the mixed credit?

The mixed credit is another alternative, it consists of a fixed rate for 5 to 10 years and then a variable rate for the remaining duration of the loan. This allows you to benefit from a fixed rate during the first few years when the interests are the most important and then to benefit from a variable rate which can of course be capped.

Why is the variable rate reappearing in the banking landscape?

At the beginning of the 2000's, the variable rate loan had the wind in its sails, but after the progressive decrease of the interest rates these last years, this form of credit did not seem to be attractive anymore. Indeed, the rates were low, so the applicants of loan and the banking organizations did not see any need to turn to the variable rate credit.

However, in the last few months rates have increased significantly, with the average rate offered by banks now being 2%. Households are finding it increasingly difficult to access real estate credit, particularly because of the usury rate, which can be a real obstacle to obtaining a loan, as we previously explained in our article.

In response to this, brokers and households are being inventive and must adapt to market conditions. The variable rate loan allows in a first step to obtain a more attractive starting rate, on average 0,5% below a fixed rate loan. In a second time, this more attractive rate allows to obtain a lower APR and to remain within the limit of the usury rate. Thus, the variable rate credit can be a solution for the households which find themselves in the impossibility of making finance their project because of the usury rate.

Credit conditions are tightening and obtaining a loan can be a real obstacle to your plans. Our France Crédit mortgage specialists can help you find the financing you need, contact us!

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