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CAP is an interest rate ceiling or hedge for a LIBOR mortgage, also known as a money market mortgage. It functions as a type of insurance. If you take out a LIBOR mortgage with an interest rate ceiling, the interest rate may not exceed this predefined limit during the agreed term.
Because of the associated additional costs, it usually only makes sense to take out a LIBOR mortgage with a CAP for larger mortgage amounts of CHF 2 million or more. For example, a LIBOR mortgage with a CAP for 3 years features the standard LIBOR interest rate, the bank's margin as well as the interest rate ceiling, plus you need to remember that there is a risk of the interest rate increasing up to that ceiling. Once you have received your mortgage offer from the lender, you are highly recommended to compare it with the current rates available for fixed-rate mortgages. A 3-year fixed-rate mortgage does not usually differ much, if at all. You can find the latest interest rates here: Compare interest rates.
Another name for CAP: ceiling
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