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Capped Rate Mortgage

Capped rate mortgages are not too common in the present climate due to relatively low interest rates. However they do serve a purpose in the marketplace for certain types of borrower.

These mortgages have a variable interest rate but there is a fixed upper limit to the amount of interest that will be charged. If the base rate remains stable or falls, the interest remains in line with it and falls too. In this way, capped mortgages combine the most attractive aspects of fixed and variable-rate mortgages

The cap will not last the entire life of your mortgage but can last as long as five years or even more, should you wish to commit for that long. They are generally worth considering when interest rates are either rising rapidly or when there is an uncertainty over which way they will go.

Some capped mortgages come with a ‘collar. This represents the minimum interest rate payable during the term. In this way the lender will set an upper and lower limit to the interest rate. For example, a mortgage with a 7% cap and a 3% collar would allow the rate to vary within those limits, but if the rates went above 7% the borrower would pay 7% and if they went below 3% he would pay 3%

Capped rate mortgages are most likely to suit you if:

- You have a tight budget but expect your income to increase over the next few years – subsequently, by the time it does, you can remortgage to a different type of product
- You are a first time buyer looking for security in your first few years in your new home.
- You think interest rates may go down and wish to benefit from the reductions but at the same time are still on a budget and need to know that your payments won’t go above a certain point.

Capped rate mortgages are a cautious but secure choice, and inevitably the rates are not as competitive as comparable fixed-rate or discounted rate products.

As with fixed and discounted products, there will be a tie-in period to prevent you remortgaging away from this rate for a set period of time. Upfront arrangement fees are also common, so watch out for high charges.