Variable-rate loans: an interest rate swap protects a business only if it mirrors the loan
9 November 2026, 08:17
On 4 November Eurostat estimated that consumer prices in the euro area rose by 4% in the year to October, double the target of the European Central Bank, the ECB. At its latest meeting it left rates unchanged, with the deposit rate at 2.5%, but investors and analysts expect a rise as early as December and 3% or more in 2027.
For those with variable-rate loans, the question often arrives together with a proposal from the bank: is it worth hedging with an IRS?
An IRS makes the cost of a loan fixed only when two agreements are added together
An IRS, or Interest Rate Swap, is a financial instrument through which the business and the bank exchange interest calculated on a reference amount, the notional, which never changes hands. The business undertakes to pay a fixed rate of interest and the bank to pay a variable one, usually linked to the same Euribor as the loan; at each due date only the difference is settled, by whichever party owes more.
The loan instalment remains linked to Euribor; the swap works the opposite way: when Euribor is above the agreed fixed rate, the bank pays the difference; when it stays below, the business pays it. Adding the two agreements together, the overall cost remains the fixed rate of the swap plus the spread, the bank's margin on the loan, whatever Euribor does. The hedge does not make money when borrowing becomes dearer: it prevents spending more, and for the same reason it allows no saving when borrowing becomes cheaper.
The hedge holds only if the swap mirrors the loan
For the sum always to give the same result, the two contracts must move together, and there are three conditions.
The first concerns the amount. The loan is repaid instalment by instalment and the outstanding debt falls, so the notional must also fall, following the repayment schedule. If instead it stays constant while the loan shrinks, in the final years the swap covers a debt that no longer exists: for that part the business is not protecting itself, it is taking a position on interest rates.
The second concerns dates and benchmark. Term, due dates and reference Euribor, three-month or six-month, must coincide with those of the loan, because any difference remains uncovered.
The third concerns the minimum rate. Many loans have a floor, below which the rate does not fall even with negative Euribor. If the swap does not have the same floor, with Euribor below zero the business pays the bank, on top of the fixed rate, the negative part of Euribor as well, while getting no benefit from it on the loan. This happened between 2015 and 2022.
The cost can be read in the market value at signing
A swap carries no visible fee. The bank's remuneration lies in the fixed rate, set slightly above what the market asks that day for the same term. The difference shows up in the mark to market, the value the contract would have if it were closed at once: if at signing it is negative for the business, that figure measures the cost it is paying. European Directive 2014/65/EU, MiFID II, requires the bank to disclose before signing the costs and charges of the instrument, including implicit ones: that sheet is the document to ask for and read.
The market fixed rate, moreover, is calculated on the Euribor expected for each year of the contract, expected rises included, not on today's: the swap makes the business spend less than a loan left variable only if Euribor rises by more than the market already estimates.
If the business later repays the loan early, the swap does not end by itself: closing it costs its value on that day, which is negative for the business precisely when interest rates have fallen.
Before signing, three documents are compared
The check is carried out by the head of administration, placing side by side the loan's repayment schedule, the swap's calendar and the cost sheet. Line by line, one checks that notional and outstanding debt fall together, that the due dates coincide and that the floor, if the loan has one, also appears in the swap. Then one asks for the initial mark to market and for the terms of a loan at a fixed rate from the outset, which reaches the same result with a single contract and no market value to monitor. Once the hedge is signed, the fixed rate of the swap plus the spread on the loan goes into controlling and into the cash forecast as a known cost until maturity.
A well-built swap says nothing about where interest rates will go: it ties the cost of the debt to a figure known from day one. Whatever does not mirror the loan, by contrast, remains a position on interest rates that the business had not chosen to take.
This article was prompted by a news item published in Bloomberg on 4 November 2026.