2 min read
Definition
A rate cap is a hedging arrangement — or a contractual clause — that limits how high your variable rate can rise. Above the cap, you are protected; below it, you still enjoy the lower rate. Caps are bought for a premium or built into a facility, and are the opposite protection to a rate floor.
In plain terms
It is an umbrella for your interest bill: you pay a little now so a storm of rate rises cannot soak you later.
Why it matters for your company
Consider a cap on a large variable facility if a rate rise would strain affordability. Stress-test first with the loan repayment calculator. See rate floor and collar.
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