Mortgage Loans and Interest Rate Floors and Ceilings

Both a good part of public opinion and some judicial decisions have considered the “floor” clauses capping the interest of variable-rate mortgage loans to be abusive because they were offset by a “ceiling” clause that, being too high, had no value to the debtor. This chapter studies the economic rationality of both constraints on the interest rate and concludes that, against this belief, the ceilings were realistic. In fact, they provided valuable protection against inflation risk, which, a priori, was more likely than the low-rate scenario we now observed. Drafters of the above-mentioned judgments appear to have fall prey of retrospective bias.