Floor rate
The minimum rate below which a variable-rate loan cannot fall, even if the reference index drops sharply. It is defined contractually in the loan offer and protects the bank. The broker must flag it to the client because it can limit the benefit expected from a market-rate decline during the loan's life.
Key points
- The floor rate is set in the loan offer and cannot be changed during the loan.
- It protects the bank's profitability in the event of a sharp Euribor fall.
- The borrower no longer benefits from rate falls once the index drops below the floor.
- The broker must explicitly flag the floor when presenting the offer.
Frequently asked questions
Why do some banks impose a floor rate on variable-rate loans?
The bank protects itself against a scenario of very low or even negative rates that would make the loan unprofitable. Without a floor, if Euribor became sharply negative the client rate could reach zero or below, eliminating all margin. The floor is therefore a commercial protection clause built into the product from the outset.
How does the floor rate affect the saving expected by the borrower?
If the borrower chose a variable loan hoping for future rate cuts, the floor caps the possible gain. For example, if the floor is at 1.50% and Euribor falls to 0.50%, the client rate stays at 1.50% plus spread instead of benefiting from the full decline. The real saving is therefore smaller than the borrower had anticipated.
What is the difference between a floor rate and a rate cap?
The rate cap is a ceiling protecting the borrower against an excessive rise in the rate. The floor rate is a minimum protecting the bank against too sharp a fall. Both can coexist in the same contract, creating a rate corridor within which the loan operates. The cap favours the borrower; the floor works against them.
In practice
A variable-rate loan is indexed to Euribor 3-month with a floor of 0.50%. If Euribor 3-month falls to -0.20%, the rate used for calculation remains 0.50%, not the actual negative index value.
Official sources
- Getting a mortgage (rate floor) · Service-Public.gouv.fr
- The annual percentage rate (APRC) · Service-Public.gouv.fr
- Mortgage credit (official guide) · Service-Public.gouv.fr