| Term | Cap - Maximum Interest Rate | Quarterly Cost of Cap | Collar - Minimum Maximum Rates | Quarterly Cost of Collar |
|---|---|---|---|---|
| 3 Years | 6% | £7,500 | 3.5 % - 6% | 3.5 % - 6% |
| 5 Years | 6% | £10,000 | 3.5 % - 6% | 3.5 % - 6% |
| 10 Years | 6% | £11,250 | 3.5 % - 6% | 3.5 % - 6% |
An Interest Rate Cap is an alternative to an Interest Rate Swap that affords you protection against an upward movement in interest rates, while still allowing you to exploit the benefit of current lower short-term interest rates.
An upper limit (or cap) is set on the floating interest rate that provides a level of protection that you never pay higher than. You are therefore insured against a borrowing cost greater than this "capped level".
An interest rate cap provides a high level of flexibility as you can make early repayments without incurring an economic cost.
The cost of interest rate protection can sometimes be reduced if the purchase of the CAP is combined with the sale of an Interest Rate Floor (FLOOR), in a combination known as an Interest Rate Collar. The CAP will protect against higher interest rates but also allows you to exploit the benefit of lower rates without any limitation. The sale of an FLOOR by you means that you will forego some of the benefit of lower interest rates. The extent, to which this benefit is surrendered will be determined by the interest rate level at which the FLOOR is sold.