Exchange variable loan costs for fixed ones

Interest Rate Swap - IRS

  • Free yourself from the uncertainty of variable interest rate and pay only the fixed interest rate
  • Lock in completely stable and pre-determined loan costs

Advantages of entering into an interest rate swap

  1. Eliminate interest risk, because the variable loan interest rate (EURIBOR) is replaced by a fixed one
  2. Lock in stable and predictable cash flows, because future interest payments are known in advance
  3. Avoid potential loss which may occur due to the growth of interest rates on loans with a variable interest rate

What is an interest rate swap?

An interest rate swap is a transaction in which the bank pays to a client a variable interest rate (EURIBOR), while the client pays to the bank a fixed interest rate on an agreed transaction amount, the so-called principal, which is not exchanged but serves for interest calculation only.

The transaction amount, i.e. the principal is identical to the loan principal, so that interest calculations in the interest rate swap and the loan would be the same.

The final effect of the transaction is that the part of the interest which the client pays on the loan and which is a result of the variable component of the price (EURIBOR) is compensated for through the interest swap, so the total net result (loan + interest swap) is a fixed liability (interest) which equals the sum of the fixed loan margin and the fixed interest from the interest rate swap.

In order to enter into this transaction, it is necessary to:

Open an account with Erste Bank

Enter into a Framework Agreement

Complete the Questionnaire for Client Categorisation

Be approved a limit (amount and period)

If you are repaying a EUR 1 million loan, with a 3-year the repayment period, semi-annual instalments and a 6M EURIBOR + 4.5% interest rate, you can enter into an interest rate swap with the Bank, which will include the same amount of principal and the interest repayment period, according to which the bank will pay you the variable interest rate EURIBOR, and you will pay the bank a fixed interest rate of 0.1%, for example.

Your monthly interest costs are fixed during the whole loan repayment period and amount to 4.6% (0.1% + 4.5%).

The net effect is that you repay your loan under a fixed interest rate, with the financial result not depending on the EURIBOR movement, whereby you are protected against interest rate growth.

Risks associated to this financial instrument

A possibility of enjoying the benefits of falling interest rates is limited.

A change of market interest rates can lead to a decrease in the market value of the purchased financial instrument.

A sale of the purchased financial instrument may lead to additional costs, depending on the situation in the market.

If you are interested in this product or if you need additional information, please contact us or send us an inquiry

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