Our lives and most of what we own are paid for with borrowed money so that in the future we can enjoy things from time to time in small pieces. So our world is messed up and even the German state is financed by money that we borrow as a nation. So there is nothing wrong with taking out loans for housing, cars, consumption and more. The world works like this and it is these many different types of credit that enable us to live well and do many things we dream of.
With a roll-over loan, the borrower runs the risk that the interest rate will increase after the end of an interest period. But he benefits from falling interest rates. It is therefore worth taking out a rollover loan if interest rate cuts are likely in the future.
Different variants of the roll-over loan
There are two types of exercise available for this special loan variant:
- On the one hand, the loan amount can be paid out in one sum. The repayment then takes place within the framework of the contractually agreed agreement.
- The second option is a credit line within which the borrower can dispose of the external funds.
Who takes out rollover loans?
The market for roll-over credit is the euro money market. This already shows that this type of loan is a loan from institutional participants in the capital market. Roll-over loans are used by companies, governments and the public sector.
Roll-over loans for consumers: The Swiss rollover mortgage
But in Switzerland, consumers also come into contact with roll-over loans. Under the names “rollover mortgage” or “LIBOR mortgage”, Swiss banks offer real estate loans where the interest rate is fixed to the LIBOR. The interest rate structure is very transparent: the current LIBOR interest rate plus a margin from the bank. When comparing banks, consumers can immediately see how high the interest rate premium of the respective bank is.
A Swiss rollover mortgage can be converted at any time into a so-called fixed mortgage, which works like ordinary German mortgage lending with fixed interest rates for several years. In the event of early redemption, a prepayment penalty applies.
Repayment on a roll-over loan
The borrower can repay the rollover credit in whole or in part at the end of each fixed interest period. This is irrespective of whether the reference interest rate has changed or not.
Since a roll-over loan is a very special form of loan for institutional borrowers or states as borrowers, the termination options also differ from loans from private individuals. The loan is initially closed for an indefinite period. The termination can take place during the term at any time when there is an interest rate adjustment.
Roll-over credit with swap
A swap is used to hedge financing against external risks. It is a financial contract that states how payments are to be made and the due dates and terms are structured. These contracts can be exchanged almost arbitrarily among the participants. If a roll-over loan is backed up with a swap, the borrower uses it to hedge against rising interest rates. The swap rate is used as a rate hedge premium. A swap makes sense if the expected rise in interest rates exceeds the swap rate to be paid.
In an interest rate swap, which is a rollover credit with swap, the two parties agree to exchange their interest on predetermined amounts. While a predetermined interest rate applies to one of the two partners, the other uses a variable one Interest back, on which he also pays the premium swap.