Capped rate mortgages
Capped mortgages are very similar to fixed-rate mortgages, in that they will not climb above a pre-set rate, known as a cap.
How do capped rate mortgages work?
A lender offers a loan with a capped rate set for a certain period. During this period, the repayments of interest on the loan cannot climb above this cap. However, if the standard variable rate of the mortgage falls below this capped rate, your interest rate repayments will fall alongside it. The maximum level of your repayments is set and able to be budgeted for easily.
How low can the repayment rate fall on capped rate mortgages?
Most capped rate mortgages have a clearly set minimum rate to which they can fall. This is known as the collar, and it is important for borrowers to know what the collar on their loan is.
What are tracker capped rate mortgage loans?
Tracker capped rate mortgages are a new type of loan offered by some mortgage lenders. A tracker capped rate mortgage tracks Bank of England base interest rate in the style of a normal tracker mortgage, guaranteeing to fall to a certain level alongside rates, or rise to a certain level if rates climb. The products typically change rates two weeks after an interest rate change.
What are the advantages of capped rate mortgages?
Capped rate mortgages allow the borrower peace of mind, because they guarantee that interest rates will not rise beyond a certain, pre-agreed limit during the course of the capped rate period.
Why aren't capped rate mortgages more popular?
On the whole, capped rate mortgages are slightly more expensive that equivalent fixed-rate mortgage loans, making them less attractive to some borrowers. Furthermore, flexibility is usually limited, and early redemption penalties can be high. Capped rate mortgages also often attract high application fees, although not in all cases.
